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

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You’ve no doubt heard many times that one of the best ways to make money in the stock market is to buy stocks when they’re “hated.” In fact, Warren Buffett has followed this path to profits countless times and used it to amass his vast fortune.

I don’t think I could find many stocks that have been more “hated” over the past few years than Bank of America Corp (NYSE:BAC). From its role in the financial crisis and housing bubble to ongoing litigation issues associated with those dark chapters for the economy, it seems like the company can’t catch a break.

Warren BuffettBut, of course, just because a stock is hated doesn’t mean you should buy it. To determine this, we have to look much deeper.

But before we do that, the first and most obvious thing to consider is that none other than Buffett himself has issued a vote of confidence in Bank of America Corp (NYSE:BAC), as evidenced by his $5 billion stake in preferred shares, which come with a steady 6% yield.

We don’t have the luxury of getting a sweetheart deal like this, but we can look to some of his recent comments about the company to get a clue into his thinking on the current status of the company — and Buffett has said Bank of America Corp (NYSE:BAC)’s mortgage issues are being addressed.

The stock’s current price is considerably below its book value of about $20, but that discount accounts for the lack of clarity about the bank’s future. For one, the company is still dealing with the fallout from subprime lending issues, largely tied to its acquisition of Countrywide Financial, and the housing market downturn.

Most recently, the federal government sued Bank of America Corp (NYSE:BAC), accusing it of misleading investors in about $850 million of mortgage-backed securities. According to the suit, the bank led investors to believe that the securities were backed by prime jumbo mortgage loans and did not adequately disclose the risks involved. Earlier this year, Bank of America Corp (NYSE:BAC) settled with mortgage financier Federal National Mortgage Association (OTC:FNMA) over loans that Fannie claimed were substandard and wanted Bank of America to buy back.

Bank of America Corp (NYSE:BAC) isn’t alone in its mortgage issues: The bank committed to cash payments of $1.1 billion and other assistance of $1.8 billion in a settlement with other banks and the government to help mortgage borrowers with loan modifications.

The most recent government lawsuit comes just when Bank of America is cutting down significantly on its litigation expenses, which were $471 million in the second quarter, down from $2.2 billion in the first quarter and from $963 million in last year’s second quarter.

Still, Bank of America reported good results for the second quarter, with net income up 63% from a year ago, to $4 billion. Earnings per share (EPS) for the period were 32 cents a share, up 68% from last year. However, revenue was up a mere 3%, meaning that profit increase was achieved through cost-cutting and a reduction in loan loss reserves as the economy improved.

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