Thursday, December 22, 2011

Buffett Got Burned on Bank of America

Is Bank of America a Value Trap at below 5.50? In Nov 2006, the stock was being traded at a high of 54.85. It was lasted traded at
5.23. Here's an interesting article by Jeff Reeves:

Buffett Got Burned on Bank of America, and There’s No Bottom in Sight
BAC is a value trap and only fodder for day traders
Dec 20, 2011, 11:35 am EST | By Jeff Reeves, Editor of
Bank of America (NYSE:BAC) is one of the most hated companies in America. Aside from past robo-signings, proposed fees and general shenanigans amid the financial crisis, the company continues to prove all of its critics right with continued missteps and ugly headlines. Its earnings can’t be trusted and its CEO, Brian Moynihan, is completely out of touch.

So it’s no surprise that despite briefly breaking below the $5 mark, nobody came out yesterday and labeled Bank of America stock as a bargain. An intraday low of $4.92 and a close of $4.99 marked the lowest levels for the stock since March 2009 — the bear market bottom that saw stocks rebound with a vengeance.

The S&P was at 676 — now it’s at 1,234. But while the major indices have doubled, Bank of America is just as ugly to investors now as it was during those dark days two-and-a-half years ago.

Very few stocks are at 2009 levels. Some of them deserve to be there — Eastman Kodak (NYSE:EK), for instance, which appears to be doomed for bankruptcy without extraordinary intervention. You simply can’t lose money and have debt that large and expect to stick around.

However, Bank of America is not like Kodak. Aside from a brutal second quarter in 2009 when it took some $20 billion in write-downs, it is nominally profitable. It trades for a paltry 0.25 price-to-book ratio — while Wells Fargo (NYSE:WFC) is at 1.0 and JP Morgan Chase (NYSE:JPM) is at 0.6!

So, BAC shares could be a bargain at $5, right?


Unfortunately, hardly anyone on Wall Street is buying that argument. It’s remarkable how few people came out of the woodwork yesterday and today trumpeting Bank of America’s bargain potential.

In fact, the biggest talking point I’ve noticed is about how Warren Buffett might be taking a bath on his risky play in Bank of America. BofA gave Buffett warrants to buy a whopping 700 million shares of common stock at $7.14 when the Oracle of Omaha plowed $5 billion into preferred shares of BAC stock. Obviously those warrants don’t really matter when shares are almost 30% under that strike price.

By some estimates, Buffett has lost $1.5 billion on the deal since that August buy-in, when shares were around $6. But don’t weep for Warren — his nice 6% dividend on his shares will keep paying him, and BAC stock has moved up from under $5 today and could keep rising.

But the fact that Buffett could ride in on his white horse with the “smart money,” buying Bank of America at $6 only to see shares hit $5 four months later … that’s enough to make every investor think twice.

As result, Bank of America should be seen as an extremely short-term play for only the most aggressive traders … akin to Sprint Nextel (NYSE:S), Sirius XM (NASDAQ:SIRI) or other big-name stocks that are super cheap and super volatile.

As for the buy-and-hold crowd, sit this out for now. Bank of America is the ultimate value trap.

Plenty of folks think Bank of America is getting what it deserves as some kind of karmic payback for its misdeeds. While there might be some cosmic justice here, the reality is that the only true recovery will see banks recover, too.

Here’s hoping Bank of America turns it around — not for shareholders, but because we simply can’t afford to see another financial behemoth go under.

Jeff Reeves is the editor of Write him at, follow him on Twitter via @JeffReevesIP and become a fan of InvestorPlace on Facebook. Jeff Reeves holds a position in Alcoa, but no other publicly traded stocks.