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BAC A Short Term Low Hanging Fruit For DoJ Official But Plenty To Like The Stock Price

|Includes: Bank of America Corporation (BAC)

BAC: News analysis

Target price: N/A

On Thursday of last week, DOJ announced the continuation of its investgitation against BoA and Citi. The settlement of $12b offered by BoA was rejected and the consensus is that a settlement between $12-15b is more likely. Given that BoA has increased its reserve in 2014Q1 but likely not enough to cover the full settlement, any additional reserve or actual settlement will take an earnings hit. Therefore, the stock price will likely fall. At least that's the logic here.

I agree the above makes sense. However, any weakness in the stock price becomes a buying opportunity given (1) the beginning of rate increase will drive the bank's NIM, (2) the economic recovery will drive the loan volume growth, and (3) continued cost cutting will make the company a lean and mean machine just right for its current business.

The storm will eventually pass. Afterall, it's an iconic American bank. Would DoJ stab the company in its heart after driving the company to its knees? I doubt it, not if the government still wants the company to pay taxes and rebuild America.

The short term pain is dealt by DoJ officials who are looking to gain on an easy prey and potentially win governmental/political seats as a tough procescutor. But there is a limit. The long term will be driven by data i.e., cylical economic recovery and better earnings ability, combined with a more rational cost structure.

Trading at 0.8 tangible book, the stock price aguably has plenty of room to grow, with or without its current CEO.

Disclosure: The author is long BAC.