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.

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 by YCharts


Bank of America Corporation Price / Sales Ratio Chart by YCharts

Even if one assumes the banking sector has entered a "new normal" of lower profits due to more stringent regulations and weaker economies, Bank of America and banking stocks in general should be valued more highly than what they are trading at currently.

Two posters from the Value Investors Club - an exclusive forum founded by investor Joel Greenblatt - argue that Bank of America, at normalized earnings of about $1.50 to $2.00 per share, should be valued at anywhere from $20 to $30 per share (according to the first poster) or $15 to $20 per share (according to the second poster).

On the other hand, if global economic and financial conditions worsen and one of the aforementioned fears materializes, one can argue that Bank of America is clearly not worth $8.

While Bank of America is not likely to go bankrupt because the U.S. government will probably not let it, it is entirely possible that the government (or the private sector) will fund Bank of America in a way that significantly erodes shareholder value or wipes it out completely.

Back in October 2011, a post by another user from the Value Investors Club claimed that Bank of America stocks are "worthless" and therefore a "terminal short."

The post claimed that mortgage-backed securities-related litigation "is going from bad to worse" and could "lead to violent erosion of shareholders' equity."

The poster was worried about Bank of America's derivatives exposure. He also claimed that the bank has incurred the hatred of the American public. This "passionate hatred," he claimed, is driving a slow but sustainable "run on the bank" (i.e. customers closing their accounts and refusing to do business with the bank).

One of the bullish posters, however, countered that even if Bank of America were forced to raise capital, it has ways of doing so that would not significantly dilute shareholder value, such as "a bankruptcy of Countrywide, the issuance of tracking stock for MER, accretive sales of business units and the further shrinking of its risk weighted assets to meet Basel III on an accelerated schedule." 

A bet on Bank of America, however, is as much a microeconomic bet on the bank itself as it is a macroeconomic bet on the global economy and financial system.

Jonathan Kolatch, a former colleague of Tepper's at Goldman Sachs, said Tepper is known for expressing a macro view through a micro instrument instead of a macro instrument, according to New York Magazine.

This is arguably the case for Bank of America, which is a potent micro instrument, instead of a macro instrument like futures on the S&P 500, through which investors can express their bullishness or bearishness on the global economy and financial system.

In early 2009, Bank of America stocks and the S&P 500 were trading cheaply; investors had priced in fears of a Great Depression and the collapse of the global financial system (which may have led to the nationalization of banks like Bank of America).

Tepper thought such fears would not materialize. But instead of simply buying the S&P 500 Index, he bought Bank of America and other bank shares and achieved better returns as a result.

In 2012, Bank of America's fate is also closely tied with the global economy and financial markets. If general conditions approve, it will ameliorate issues like derivatives exposure, weak activity in the capital markets, populist anger and perhaps even looming lawsuits.

If conditions worsen, however, one can easily see how one or more of the catastrophic scenarios mentioned above could materialize.

The Value Investors Club bulls on Bank of America acknowledged the possibility of catastrophic scenarios. After all, no one can really confidently predict complex matters like the global economy, politics and lawsuits.

However, they still like the odds on Bank of America.

One of the bullish poster framed the investment as a "binary situation," which, assuming the odds of catastrophe and success are at least equal, would favor the long investor.

At Feb. 23, 2012, levels, catastrophe means a loss of at most 100 percent while success means gains of as much as 275 percent.

One smart way to play Bank of America, therefore, is a bull call spread options strategy, suggested the poster.