Bank of America and Wells Fargo Are Buys At Current Levels

The problem with the whole credit market melt-down is the good get lumped in with the bad. Leverage in these markets has been the big-culprit in forcing institutions to sell at the market to discount bidders. The leverage of several funds has turned positive equity positions into negative equity and forced the selling.

Traders know when a seller is desperate and will lower the bids in an already volatile market. It's a lose-lose proposition.

Two banks that both reported excellent June quarter results, but have recently seen their stocks at 52-week lows are Bank of America (BAC) and Wells Fargo (WFC). Both did take their reserves for bad loans to higher levels than the first quarter, but both also achieved their stated quarterly expectations, and then some.

The difference between Wells Fargo and Bank of America versus other mortgage issuers is Wells and B of A can sit on and own the underlying paper. They do not need to package and re-sell the paper to loosen up capital. They can stand the test of time---and volatility. Also, as pure mortgage players fall by the way-side, when this market stabilizes, these two titans stand to dramatically increase their respective market share and of course, fee income.

Looking at the key metric for any investment--risk vs, reward, I can see 50% upside over the next 18 months for both of these banks stock value, not too mention the healthy dividend yields of 5.3% for Bank of America and 3.6% for Wells Fargo. Both have solid consumer and business franchises.

If the Federal reserve does indeed drop the key discount rate from 5.25% to 4.75% or even lower, these two will benefit quickly as investors chase these stocks to lock in the higher dividend yields

As Benjamin Graham wrote "short-term the market is a voting machine, but long-term it is a weighing machine." Both of these finely run banks should "weigh" more in 1-2 years than they do today.

BAC-WFC 1-yr chart:

Comments

[Al Rob:]

You fail to state any specific reason why you see 50% upside from here. You make a case that downside from here is limited due to these bank's strong balance sheets and and diversified operations and I agree with you. But that doesn't mean that the stock will go up. What are your EPS estimates? What is the outlook for commercial lending? What effect will retaining loans have on EPS over the next few quarters? Do you really think that with all the issues and the slowing economy that these stocks should be trading significantly higher than ever before?

2007 Aug 13 11:03 AM

[Jim Glazen:]

This author also thinks Crocs is a bona fide growth story. lmfao!! Enough said.

2007 Aug 13 11:53 AM