Updated with news of a new MBS lawsuit and updated share price.
NEW YORK (TheStreet) -- Is Bank of America (BAC) - Get Bank of America Corporation Report still a buy after its 45% rally in 2012? Or is it time to book profit, especially as the Dow looks poised for a pullback after touching 13,000 Tuesday?
Your answer probably depends at least in part on where you fall on the debate over Bank of America's valuations. Long-term bulls from Fairholme Fund's Bruce Berkowitz, to Second Curve's Tom Brown to Rochdale Securities analyst Dick Bove argue that the stock is still cheap and has plenty of room to run.
In an interview with Bloomberg Television, hedge fund manager Tom Brown said he expects the stock to go up to $20. ""We didn't buy it for a move from $5 to $8; we bought it for a move from $5 to $20," Second Curve Capital chief Tom Brown told
interview last week . Brown got into the stock at the start of the year.
Dick Bove is even more bullish, arguing the stock has the potential to hit $30. "I think there's $3 in earnings power there and this stock can easily sell at 10 times earnings, once you recognize that the company is two companies: its Countrywide and its Bank of America and once you get Countrywide taken out of Bank of America, which is the lawsuits are paid, the bad loans are paid, the foreclosures are done, all of a sudden Bank of America is there and Bank of America can earn three bucks," Bove said in a
recent interview .
Berkowitz also recently expressed confidence that
Bank of America will fix Countrywide and remains committed to his big bet on the stock, even though it destroyed his portfolio in 2011.
Of course, it could be a while before the stock price actually sees these fancy targets, so whether you should buy or not depends on your time horizon. In a
poll conducted by
earlier this year, more than 75% of you, or 907 readers, said the stock will hit $10 sometime this year. That is still a decent 25% upside from these levels.
at least three analysts have downgraded the stock in recent weeks to the equivalent of a neutral rating, following the steep run up in the stock.
While analysts seem to agree that Bank of America has largely addressed its capital adequacy issues with its series of asset sales, many express doubt that the bank has any significant earnings power as it continues to shrink its balance sheet.
No one is ready to scream sell yet, because the stock still trades at only about 60% of its tangible book value, despite its significant rally.
But the problem with the "valuation is attractive" argument is that the stock, on a price-to-earnings basis, is not exactly cheap.
In fact, the stock trades at nearly 11 times its consensus earnings estimate for 2012, which is a significant premium to
multiple of 8.
Bank of America's problems are hardly behind it. Fresh lawsuits related to mortgage practices continue to hit the big banks. On Wednesday, Bank of America, JPMorgan and
and more than half a dozen banks were sued by Sealink Funding, an Irish entity, over $949 million in residential mortgage backed securities.
KBW analyst Fred Cannon, who has been bearish on the stock for some time, argues that the it makes no sense to buy stocks that trade at a discount to book value, if their earnings potential is limited. "Why buy a stock, if all it can earn is 2% on its book value? If it is a bond, you would not do it," he said in a recent interview.
Investors like Second Curve's Brown believe that the stock should trade closer to tangible book and that current valuations are "too low relative to even their weak earning potential," according to a radio interview with Tom Keene and Ken Prewitt on "Bloomberg Surveillance."
But value investors need to have patience. And with the stock also unlikely to yield much on dividends relative to other banks, investors need to calculate whether they might not be better served looking elsewhere.
After a strong move in large-cap bank stocks so far this year, we prefer banks with the ability to increase capital return in 2012," McDonald wrote in a recent note, citing
as examples. He believes "the prospect of higher dividends or share buybacks is at least a year away," for Bank of America.
if you are betting on the American economy , then you might still want to stick to Bank of America, because its earnings picture is bound to improve if the economy picks up. That is probably why the stock shoots up and down on macroeconomic news out of Europe and the U.S. Which makes it a trader favorite, at least for now.
Shares of Bank of America were down 0.8% at $8.04 on Wednesday morning.
Is it time to get out of Bank of America? Vote in our poll and let us know what you think.
--Written by Shanthi Bharatwaj in New York
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