My investment thesis for Bank of America

Author: Taj McCree

Covestor model: Value and Growth 2

Disclosure: Long BAC

It’s easy to grab the bull by the horns when it’s charging, but I believe it can more profitable to catch the bear in its deepest state of hibernation.

I view Bank of America (NYSE: BAC) as that proverbial bear in the market – a sleeping giant that I feel will provide long-term steady growth and stability to my portfolio. Recently, legendary investor Warren E. Buffett in a show of confidence put $5 billion into Bank of America, which gave the bank’s shares a lift. Of course, I am not predicting Buffett’s move to be an instant cure-all, and in fact after the brief surge BAC stock prices have fallen to a new 52 week low. Still, I cannot help but seeing this as one of several signals that the future of Bank of America is one of a slow and steady recovery. Buffett obviously has a history of picking winners, so of course this substantial investment from Buffett should draw considerable interest from investors. After all, this is a stock that was over $13 a share at this time last year, now available at just under $6 a share. Bank of America is still the largest consumer bank in the United States and boasts a great deal more fiscal diversity than most major banks.

Now, I can say with confidence, and somewhat with pride, that I did not follow Buffett into Bank of America. I bought shares long before he did, but I did so with the Buffett philosophy of investing in mind, buying a company when the market indicates its a bargain according my assessment of fair value. Although recent events in the European market (think Greece) and our own fears of a double dip recession in the U.S. have roiled financial stocks as a whole, I believe Bank of America will still be a relatively stable stock to own over the long term.

Of course, some disagree. Some reports from investors and journalists alike indicate the average investor would be foolish to buy the stock, since it’s impossible to get the same deal as Buffett. They’re right, and the average investor does well to recognize this before taking the plunge. The following articles will give you an idea of what I’m talking about:

In terms of this model, my philosophy is not to follow Buffett, but rather to invest with some of the principles that made value conscious investors like Buffett successful.  In this case, he just happened to invest in a position I already had a stake in. I’m happy he did. A decade from now, if the economy is in full recovery and financial stocks look good to the average investor again, I believe Bank of America’s stock will once again be attractive, resulting in a higher stock price. I think those who entered the market during this time of crisis will be rewarded with good returns and – dare I say – a respectable dividend. This is a long-term investment strategy that may not have any significant upside for several years. The short term volatility of this stock is too much for the day trader or market timer in my opinion, but a value and growth investor who has the patience to rise the storm may reap the benefits down the line.

Here’s what I see for the future: Bank of America continues to aggressively pursue cost-cutting moves to correct years of unsound speculation during the real-estate mortgage boom. For example, the decision to sell off half its stake in China Construction Bank (CCB). The sale of 13.1 billion shares of CCB for $8.3 Billion in cash also demonstrated Bank of America’s ability to raise cash if and when the situation requires it, belying fears that Bank of America was unable to access liquid funds.

The bottom line is that the banking industry is vital to the U.S. economy, and Bank of America is the largest consumer bank in the United States, having steadily increased their assets between 2001 and 2010. What sets Bank of America apart from its counterparts both past and present is its heavy diversification. Bad mortgages and a multitude of lawsuits account for most of Bank of America’s current woes, yet Bank of America’s resiliency should show itself in its heavily diversified business in investment banking, commercial banking, consumer banking and credit products – in addition to its mortgage products.