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VIDEOTicker Shock: Three Reasons to Bank on Bank of America
Monday's top stories and stocks with potential to move.
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The Hang Seng closed up more than 5%. Meanwhile, the Nikkei was closed on holiday. European stocks were in positive territory this morning. And here in the US, we're currently trading higher.
Here's what I’m focused on this morning:
Bank of America (BAC):
Per Reuters: “Bank of America is working on plans to raise more than $10 billion in fresh capital, even as it and Citigroup (C) launch last-ditch attempts to convince the US government they do not need to bolster their balance sheets, the Financial Times reported.” What I’m not seeing reported is how it might raise that money; would be through a stock offering, or what? Obviously dilution, or the potential thereof, is one of the first things that comes to my mind and would concern me.
With that in mind, I want to point out that although the company certainly doesn’t appear to be out of the woods, Bank of America is a sandbox I’d consider playing in. (Although admittedly, I’d rather wait for a bit of a pullback because I think the financials as a whole have come too far, too fast.)
Here’s what I like:
1. The insider buying earlier in the year;
2. Expectations that the company may be back in black this year and next. (Note: That’s in sharp contrast to Citi, which reportedly may need to raise money.)
3. The board and front-line management get the drift that its shareholders are going to hold their feet to the fire to make sure they do the right thing, and ultimately find ways to increase shareholder value. Check out this BusinessWeek article discussing its shareholder meeting.
I think the stock does consolidate and pull back over the next couple of weeks. But longer-term, the company is one that will be a survivor, and whose stock will ultimately be a winner. I could see it trading in the teens within the next 12 to 24 months.
Berkshire Hathaway (BRK-A):
It’s nice to hear the Oracle of Omaha opine about Berkshire, and how he thinks the economy is doing. But I think there was a little too much coverage of the shareholder meeting, and that too many people put too much stock in what Warren Buffett says, in general. Yeah, I know - he’s got an unbelievable record, folksy charm and he's a legend. He deserves respect - he’s earned it. And I’ll admit, my head pops up when Warren is on CNBC, as he was this morning.
However, this economy has evolved over the years: There are so many moving parts, so many unknown variables, so many new players in the market, that I just don’t think his "buy Coke (KO) and hold it forever" philosophy will be as successful going forward. Call me a pessimist.
And I know people have been talking about it for years, but Buffett is getting older. When he decides to step down (or the inevitable happens), the Berkshire ship may have trouble steering a clean course without him. I’ve heard talk that internally, there are people who can take his spot, and there's a feel that the businesses he owns are solid and will continue on for a long time after he’s gone. Maybe that's true, but a lot of people bought into Berkshire on the Buffett mystique. Without him, the stock will lose its luster and sink. Maybe not like a stone, but sink nonetheless.
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