Bank of America Stock Value: $30 or Zero?

Analysis

By Hao Li: Subscribe to Hao's RSS feed

February 23, 2012 5:44 PM EST

Some people think the value of Bank of America (NYSE:BAC) stocks is zero. Others think it is as high as $30.

Bank of America has wide consumer recognition and is only 54 percent institutionally owned, so many retail investors care about it. However, because of its sheer size, it also draws the attention of the biggest players in the game.

Hedge fund manager David Tepper, by buying cheaply shares of Bank of America and other battered financial companies in 2009, made about $7 billion for his fund that year.

When Tepper bought his Bank of America stocks in early 2009, they were trading around $3. By the end of 2009, they had climbed to $15.

In late 2011, however, Bank of America shares dropped below $5 again on a general market decline, worries about its exposure to the European debt crisis, legal troubles surrounding its soured mortgage-backed securities and foreclosures abuses and new regulatory requirements from the Basel III Accords.

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All these concerns led to fears that Bank of America may not have enough capital to survive in its current form.

So far in 2012, such concerns have eased amid a general bullish sentiment; Bank of America shares have rallied about 44 percent year-to-date. Whoever correctly predicted this movement, like Tepper in 2009, would have profited handsomely.

On Feb. 23, 2012, Bank of America stocks are trading around $8 per share. The mean and median analyst price target on Bank of America is $9.00 and $8.25, respectively. The high target is $14.50.

Bank of America "has recently removed key risks by improving its capital position and reaching a mortgage foreclosure settlement. While we continue to believe BofA faces headwinds to an earnings recovery, we view improving sentiment as likely to continue to support BAC in the near-term," stated a UBS research note, which has a neutral rating on the bank.

While institutional analysts have relatively tame forecasts, some investors, looking over a longer time horizon, argue that the price of $8 per share is not remotely sustainable. In other words, Bank of America is due for a big move either up or down.

If one presumes Bank of America is healthy enough to survive and recover, it should clearly not be trading at $8 per share (and certainly not the $5 per share it was trading at earlier).

U.S. bank stocks in general, having priced in some of the fears mentioned above, are trading cheaply as a group. But Bank of America's low price is even more pronounced than its peers'.

Bank of America Corporation Price / Book Value Chart