Where Is Bank Of America's 'Overdue' Recovery?

| About: Bank of (BAC)

In an article I wrote May 1, I outlined the three primary reasons for my bullish long-term outlook on Bank of America (NYSE:BAC). The first described the bank's massive cost-cutting efforts under the "New BAC" project, which should improve the company's income enormously in coming quarters. The second dealt with the valuation metrics of the stock itself -- the bank is undoubtedly undervalued by traditional measures. The third point argued that market pessimism was driving shares artificially low based on emotion and spillover from European concerns.

About two weeks later, I wrote another article contrasting the logic behind the additional drop in BAC's share price with the relatively low exposure that the bank had to PIIGS debt (derivatives included). The shares were trading just under $7 a share, and they've just begun a fresh rebound that may (or may not) last.

After reading many bullish cases for the bank based on many of the same valuation metrics I used, as well as the argument for limited exposure to Europe, I've come to the realization that all the frustrated shareholders may have to wait a few years (not just months) for the market to focus on fundamentals again. We can throw around figures from the balance sheet and quarterly reports all we want, but it still boils down to investor mistrust. And much of it is well-placed.

Obviously there is the ever-persistent threat of unfavorable government regulation, which is unpredictable and shows no signs of disappearing (especially in a presidential election year, which is almost entirely focused on economic policy debates). Prominent voices like Sheila Bair (former chair of the FDIC) and Richard Fisher (president and CEO of the Federal Reserve Bank of Dallas), among others, have been calling for a breakup of the TBTF banks due to the difficulty in managing them. JPMorgan Chase's (NYSE:JPM) recent trading disaster certainly does not help.

Then there are other potentialities that could hurt. Our impossibly low interest rates will have to rise, inducing losses in the value of bond holdings. Since many banks and institutions have been loading up on treasury bills since the financial crisis, these ultra-low-yield assets might get crushed someday.

Then there are the "surprises." On top of scary litigation expenses which still plague BAC in particular, government agencies (in this case, Freddie Mac) continue to find pockets of fraudulent loans. Until these surprises stop showing up, a huge number of investors will surely steer clear. I really don't blame them.

The original/bullish idea that BAC stock can trade as high as $30 a share or more in, let's say, five years remains intact. The only problem is that the isses depressing the shares are annoyingly persistent, which makes me think that the shares will be trapped in the current $5-$10 range until the big picture begins to change (which could take years). Even with bank earnings at five-year highs, I think we will need more than a few solid quarters to regenerate investor faith in BAC.

Having emphasized the pitfalls of TBTF investing, I maintain that BAC should be bought aggressively anywhere near $5-$6 a share on valuation alone. Even if Greece's economy evaporates overnight, the company's core business would have no reason to suffer as much as its stock price would. If you're playing for the >100% gains that many of us are expecting, just be prepared to hold for a very long time.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.