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The tide seems to be turning for
Bank of America
, which agreed to buy Countrywide Financial and Merrill Lynch last year while both were on the verge of collapse.
Chief Executive Officer Ken Lewis has said the bank was profitable in the first months of 2009 and predicted the company will generate earnings of as much as $50 billion before provisions and taxes. Bank of America has received $45 billion in the Troubled Assets Relief Program plus a guarantee of $118 billion of its assets. Add to this the benefits from the Financial Accounting Standards Board's relaxation of the mark-to-market accounting rules, announced yesterday, and good times could be ahead for Bank of America.
Regardless of the promise that these developments have for Bank of America, an investment in the company's stock shouldn't be considered safe just yet. Bank of America is saddled with an adjusted beta value of more than 2, twice as much as the market as a whole. The shares have plunged 82% in the past year, more than twice that of the Dow. This year, the bank's stock has halved.
The health of Bank of America took major hits over the past year, with the Countrywide and Merrill Lynch acquisitions proving trickier and costlier than had first appeared. This, with the addition of Bank of America's exposure to credit card and mortgage debt, has created an ugly balance sheet for this massive institution.
Relaxation of mark-to-market accounting rules may help bolster Bank of America's balance sheet, assuming the company wrote down troubled assets well past internally generated assumptions of fair value, but it could also disguise problems.
Investors need to decide if the financial crisis was primarily caused by a simple lack of liquidity or toxic assets. If the former is true, the relaxation of accounting rules would help banks and provide investors with a better picture of the economic reality. But if assets held on Bank of America's balance sheet are really as bad -- or worse -- than current values would suggest, this is simply an accounting game that may lead to more losses.
A less dour economic outlook and a stock-market rally suggest the gloom may be lifting. However, investors need to be aware of the risks that are still very much a reality for banks. TheStreet.com Ratings gives Bank of America a "hold" rating with a grade of C-minus. While our model still rates it above
, which has a "sell" rating and a grade of D, risk-averse investors should steer clear of Bank of America.
TheStreet.com Ratings, recently cited for Best Stock Selection from October 2007 through February 2009 , is an independent research provider that combines fundamental and technical analysis to offer investors tremendous value in volatile times. To see how your portfolio can use this research,
Prior to joining TheStreet.com Ratings, David MacDougall was an analyst at Cambridge Associates, an investment consulting firm, where he worked with private equity and venture capital funds. He graduated cum laude from Northeastern University with a bachelor's degree in finance and is a Level II CFA candidate.