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BAC - Bank Of America - One Of The Worlds Largest Financial Institutions Is Making A Big Mistake
By Geoff Green | April 30, 2008
Talk about bad market timing for Bank of America, stock market symbol BAC. Not only are it’s earnings reeling from the current mortgage loan fiasco but BAC is in the process of taking over Countrywide, the nations largest mortgage loan provider.
Does BAC really think they can get back on the growth path by purchasing a failing financial institution? Wouldn’t it be more efficient, less risky, and less costly to expand the mortgage loan market through organic growth?
One would think so, especially since BAC’s EPS is 85% below expectations at a paltry nickel a share - no wonder the stock price is in a down-trend!
Here is a summary of BAC’s business:
Bank of America, (BAC) Bank of America Corporation, a financial holding company, provides banking and nonbanking financial services in the United States and internationally. It operates through three segments: Global Consumer and Small Business Banking, Global Corporate and Investment Banking, and Global Wealth and Investment Management. The Global Consumer and Small Business Banking segment offers savings accounts, money market savings accounts, certificate of deposits, individual retirement accounts, and regular and interest-checking accounts; consumer cards, business cards, debit cards, international cards, and merchant services; mortgage products for home purchase and refinancing needs; insurance services; and lines of credit and home equity loans. The Global Corporate and Investment Banking segment provides commercial and corporate bank loans, indirect consumer loans, commitment facilities, real estate lending products, and leasing and asset-based lending products for banking clients, middle market commercial clients, multinational corporate clients, public and private developers, homebuilders, and commercial real estate firms; advisory services, financing, and related products for institutional investor clients in support of their investing and trading activities; debt and equity underwriting, merger-related advisory services, and risk management solutions; and treasury management, trade finance, foreign exchange, short-term credit facilities, and short-term investing options for correspondent banks, commercial real estate firms, and governments. The Global Wealth and Investment Management segment offers wealth management and retail brokerage services, as well as asset management services, including mutual funds, liquidity strategies, and separate accounts. As of May 2, 2007, the company operated approximately 5,700 retail banking offices and 17,000 automated teller machines. Bank of America Corporation was founded in 1874 and is headquartered in Charlotte, North Carolina.
BAC’s growth rate has shrunk from about 16% a year ago to a negative growth rate of -5% today. Is this a stock that you should own?
As always it depends on your investing strategy and your market timing analysis.
However, I’m never a supporter of holding stocks that are in a down-trend, regardless of your time horizon. You have to ask yourself why you would want to own a stock that is trending down in price. Would it be because you think the price will eventually reverse and start going back up?
A lot of Bear Sterns stock investors tried to play that game and look at the situation they are in now.
A better investing strategy is to use market timing to get into the stock when earnings and growth has improved and it has started its up-trend - if it ever does start an up-trend. It’s much safer then trying to guess where the bottom is.
Let’s take a look at the stock chart for BAC on a weekly basis over the last 3 years.
As you can see by the stock chart and BAC is definitely in a down-trend, and just about every market indicator is pointing to lower prices ahead.
The Bollinger bands are all pointing down as are the moving averages.
The stochastic indicator has been tracing lower highs and lower lows since the overall stock market down-trend started in November of 2007.
The MACD has also been tracing lower highs and lower lows since November. Although the MACD is starting to show a little strength, the price and volume action of BAC greatly overshadows any indicator strength at this time.
BAC stock price has traced a symmetrical triangle centered around the lows created around the end of 2006 and the beginning of 2007. A symmetrical triangle at this level is likely to be a consolidation before resumption of the down-trend that started in November.
If this is the case and BAC drops out of the symmetrical triangle - especially on increasing volume - you could expect prices to drop to the $26 level or so before finding a real meaningful bottom.
On the other hand, if BAC moves up through the top of the symmetrical triangle - again, especially on increasing volume - you might expect a resumption of an up-trend.
In my opinion a drop through the lower boundary is more likely, especially with the deep financial problems that BAC is inheriting from Countrywide.
The problems at Countrywide that will not only consume BAC’s precious financial resources but will defocus attention from its core business. BAC is unlikely to make it to our weekly list of best stock picks for along time.
This is a takeover that is going to affect BAC negatively for a long time.
On the other hand - perhaps the takeover was orchestrated over a weekend on the QT in the same fashion that the Bear Sterns takeover by JP Morgan was arranged?
What do you think? I’d be interested in your opinion, please use the comments link below.
Topics: Bollinger bands, Stock Analysis, bearish, lessons, stochastics, stock analysis lessons, technical analysis, trend analysis |
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