Bank of America Still a Favorite of Fund Managers

BOSTON (TheStreet) -- Bank of America's(BAC) first-quarter earnings results fell short of analysts' estimates due to mortgage woes. Investment managers aren't giving up on the U.S. bank stock yet.

Concerns over repurchases of soured mortgages, known as putbacks, have dogged Bank of America shares. While the S&P 500 has climbed more than 4% this year, Bank of America shares have underperformed, falling 1.6%. Today, the stock dropped more than 1% to $13.13. Bank of America reported a quarterly profit of 17 cents a share, falling well short of Wall Street's average target of 27 cents a share.

Fund managers such as Harry Rady say Bank of America is only treading water, held back by the continued uncertainty around the bank's credit portfolio and mortgage putbacks. Rady, who owns Bank of America in the Rady Opportunistic Value(ROVYX) along with several other funds, says investors should look past the quarterly numbers and understand Bank of America's real value as a long-term holding.

"The risk/reward profile of Bank of America is attractive," Rady said by phone Thursday from his San Diego office. "I would look at it as a compressed spring. If they can get this mortgage putback issue behind them, that spring could rocket this stock into the high $20s. Until that happens, I would suggest that it trades between $10 and $20."

During the first quarter, the mortgage pains were significant for the bank. Bank of America was forced to set aside $1 billion to cover possible requests to repurchase mortgage securities. That's nearly double the $526 million in the same quarter a year earlier, showing that the cloud of putbacks may continue to hang over Bank of America's shares.

However, most investors should be well aware of Bank of America's putback risk. Instead, Rady argues that investors would be wise to buy an institution for Bank of America at tangible book value, which is the estimate of the bank at liquidation values, because of how attractive the franchise name is once the bank can put its issues behind it.

"Any time you get an opportunity to buy a franchise -- something with the name 'Bank of America' -- for tangible book value, that's like buying a business for the cost of the tables and chairs," he says. "The downside is protected by the fact that we're buying it at tangible book value. The upside is that when they fix the credit problems, the putback issues and the economy recovers, they'll be rewarded for this valuable, irreplaceable franchise that exists."