Bank of America Corp (BAC): Is It Time To Follow Buffett Into This ‘Hated’ Stock?

Bank of America Corp (NYSE:BAC)’s 2009 acquisition of Merrill Lynch is bearing fruit, with its global wealth and investment management business division reporting second-quarter revenue of $4.5 billion, up about 10% from a year ago. The division’s assets under management also increased, and asset management fees jumped 10%. The bank also reports that it is able to meet standards showing it has enough capital to weather losses.

Annualizing its EPS for the second quarter, the company’s price-to-earnings ratio is a reasonable 11.35, and its price-to-book ratio is an attractive 0.7. Although BAC’s current dividend yield is only about 0.3%, management could buy back as much as $4 billion in stock.

Risks to Consider: The major risk facing Bank of America stems from the liabilities related to its mortgage lending and securitization activities. While the improvement in the housing market means that the worst of the downturn is likely behind us, other claims could surface against Bank of America, particularly in connection with the subprime activities of Countrywide Financial, which Bank of America acquired in 2008.

Action to Take –> BAC is unlikely to test the lows it saw in early 2009, when it sank all the way to $2.53, down from more than $50 a share in 2007. And BAC does present considerable upside, considering it may regain its luster as the economy improves. Even then, what worked for Warren Buffett might not work for you, given the considerable headline risk associated with BAC. Those enticed to buy by Bank of America’s value proposition may want to wait a bit to see how things play out.

P.S. — The worst of the mortgage crisis might be behind Bank of America, but the entire banking industry could be facing a huge new threat — from Apple. To find out how the tech giant’s recent $256 million move could be bad news for banks, click here. 

– Poonkulali Thangavelu