Bank of America: It's All You Need to Know

With Bank of America rallying from its depths, some investors are viewing the firm as a benchmark not just of banking, but of the entire U.S. economy.
Publish date:

Updated from 11:18 a.m. EDT

Now that

Bank of America

(BAC) - Get Report

shares have climbed far from the depths of single digits and sustained that meaningful rally, some investors are looking at the firm as a benchmark not just of banking, but of the health of the U.S. economy.

Not a few investors have become more bullish on the country's prospects. Positive signals from economic data and the banking industry have outshined the clatter from cynics and naysayers. Those who are betting on a near-term economic resurgence are betting on BofA.

"A lot of traders are starting to identify BAC as a bellwether stock," says Lee Munson, chief investment officer of Portfolio Asset Management.

Last Wednesday Munson's biggest position was in Bank of America, while he was shorting the broader sector by using the ETF

UltraShort Financials ProShares

(SKF) - Get Report

. While the play seems counterintuitive to some degree, Munson says it's a popular one because BofA is "safer and purer" than other banks that are overexposed to a particular geographic area, rely on proprietary trading for profits, or shore up confidence with "big personalities" like

JPMorgan Chase's

(JPM) - Get Report

Jamie Dimon.

Bank of America is the nation's largest bank, serving one half of the country's households through mortgages, credit cards, small business loans, corporate relationships and portfolio management. It has received a huge amount of taxpayer support with $45 billion in bailout funds. It acquired two deeply troubled firms at the crux of the crisis, Countrywide and Merrill Lynch.

In effect, Bank of America is the economy.

"Remember in the old days, whatever


(INTC) - Get Report



(CSCO) - Get Report

did, that was it?" Munson continues. "Well, right here, right now, for the last several weeks, traders are looking at BAC on their screens all the time. Nobody's looking at the

KBW Bank index anymore. Everybody's looking at Bank of America."

Even hedge funds that are focused on financials have gotten into the fray, as profits dried up from an arbitrage bet on


(C) - Get Report

massive conversion of preferred stock into common shares. While going long BofA is a fairly basic trade, it has also been incredibly profitable for anyone who entered the stock at subterranean levels earlier this year.

Bank of America shares have climbed mightily from a low near $2.50 in late February to a recent high above $15. It broke through the $10 barrier in mid-April and remained consistently above that level since early May.

The rally comes amid positive signals in several key economic areas, aside from unemployment, which generally lags other indicators. Housing seems to have begun to stabilize or improve in some markets, credit conditions have begun defrosting, and consumers have cautiously started to spend again. Concerns about inflation are starting to replace deflation, as prices have begun to rise amid improved demand.

Banks are also doing better than expected, with the stress tests ultimately becoming a relief rather than a drag. They moved quickly to raise a mammoth amount of capital from voracious investors who plunged more than $75 billion into the country's top financial firms.

Ten of them, including JPMorgan Chase,

Goldman Sachs

(MS) - Get Report


American Express

(AXP) - Get Report


Morgan Stanley

(MS) - Get Report

, are now on the way to paying off bailout funds. Others, like BofA, Citi and

Wells Fargo

(WFC) - Get Report

, received regulatory approval for plans to shore up their balance sheets.

Still, all of these improvements may be illusory if the real economy is actually plunging off a cliff. Certainly, some respected economists and observers like Nouriel Roubini, Meredith Whitney, Sandy Lewis and William Cohan believe it is.

Joe Keetle, senior wealth manager at Dawson Wealth Management, points out that the Countrywide and Merrill purchases, combined with economic uncertainty, continue to constrain BofA's share price, which was above $30 just a year ago.

"There were two purposes for buying bank stocks, one was potential for growth, and the other was safety and fairly large dividends," says Keetle. "Now it's just the earnings potential going forward and the growth potential there, because the dividends are pretty much zero, and the safety is gone."

Still, Keetle agrees that Bank of America has "certainly become more of an indicator" of the economy and banking sector.

Richard Bove, a bank analyst at Rochdale Securities who holds a buy rating on BofA shares, upgraded his price target over the weekend to $19 from $14. His explanation, in effect, used the company as an indicator of the industry.

Bove cited improved confidence, which he believes will help the banking industry, and therefore push up the price-to-earnings ratio on BofA shares. He added that support of BofA management, like CEO Ken Lewis, has improved as well, and that it "is becoming increasingly apparent" that Countrywide and Merrill were smart acquisitions.

"Driven by hysteria and unfounded fears, the multiples on bank stocks collapsed and the price of Bank America's stock plunged to a low of $2.53 per share," he wrote. "It is now being conceded, by even the most bearish observers, that claims that the industry was insolvent were incorrect and, therefore, banking will survive and possible thrive."

The key question for investors is whether BofA's share price has more room to grow in the immediate future. Its vast exposure to fragile consumers, as well as its thorny acquisitions, may prove bountiful, but also make the bank a relatively risky bet in the near term.

Chris Armbruster, senior research analyst at Al Frank Asset Management, says investors are using the stock as a source of direction for the economic crisis, whether or not they hold a position. If BofA, which went through what Armbruster calls a "near-death situation," can make it out alive and well, it will boost confidence across the sector, especially for firms that are better capitalized with less severe asset problems.

Still, the analyst considers BofA one of the riskiest plays among banking titans, with JPMorgan on the safest side, and Wells Fargo somewhere in the middle. While he believes the stock has room to grow, and his firm holds it on the conviction buy list, Armbruster is less certain that growth will occur any time soon.

"It's a leveraged way to play the banking sector, because if things go well, Bank of America will outperform," he says. "And if things go poorly it could significantly underperform."

Even Munson, who calls BofA "a winner" and "the most solid choice," has to concur.

"If it breaks $10," he says, "all hell breaks loose."