Looking ahead to 2011, one of the stocks I’m going to be buying is Bank of America (NYSE: BAC). Why? Because BofA is a proxy not just for the financial sector but for the American economy as a whole. Since a number of economic indicators appear to be turning around slowly, I’m hopeful the next 12 months will see Bank of America’s stock turn around too — and provide good returns from its current pricing.
Admittedly, this is a bit of a risky call despite BAC stock rising about 17% in the last month. Bank of America has many problems in many areas – from a backlog of foreclosures to new regulations, to Uncle Sam’s ownership stake to plain old bad PR. But if you don’t want any risk, you simply shouldn’t be buying individual stocks in the current volatile market.
I won’t pretend there aren’t plenty of reasons to talk yourself out of buying BofA. But here are the reasons I found that talked me into buying:
How Worse Can Things Get?: Bank of America’s five-year return has delivered something close to a -70% loss, and it’s off more than -30% from its 2010 high around of $20. Clearly, Wall Street is painfully aware of the problems facing BAC. Just as I believe too much success is already baked into some overbought tech stocks (that’s another story), I believe plenty of failure has been baked into BAC. Frankly, what surprises are there left that would revise Wall Street’s negative outlook on this stock any lower?
The ‘Experts’ Have Targeted 50% Gains on Average: Trust me, I’m as skeptical of expert analysts as the next guy. But for what it’s worth, out of 26 analysts with targets on BAC stock, every single one has predicted an upside to shares according to Thomson/First Call. The low target is $13 (about where the stock is now) and the high is $26, with an average of $18. The fact that even the worst forecast on Wall Street is for zero downside is worth noting.
Possible Dividend Boost in 2011: According to Bank of America executives, the company’s balance sheet is shored up and a dividend is likely. CEO Brian Moynihan hinted on Dec. 7 at a Goldman Sachs conference that a dividend increase was a possibility. What’s more, the Federal Reserve seems ready to sign off on increased dividend payments for banks that took TARP cash (the healthy ones only, of course) for the first time since the financial crisis. Not only would a bigger dividend payout be nice for shareholders, the buying pressure created by income-hungry investors could be doubly fortuitous for BAC stock. As more investors have chased dividends, news that Bank of America will be delivering a better yield could create a bump in buying pressure.
Government Meddling in BAC Will End Soon: In September, bailed out AIG (NYSE: AIG) sold its Star Life Insurance Co. and Edison Life Insurance Co. to Prudential (NYSE: PRU) as part of an effort to payback taxpayers. General Motors (NYSE: GM) held an IPO just before Thanksgiving as a way for Uncle Sam to start moving out of the stock and returning the company to private investors. The Treasury Department sold its final stake in Citigroup (NYSE: C) for $10.5 billion in the beginning of December.
It’s clear the government is eager to get out of its stock takeovers, and Bank of America will be next on the list. The company is reportedly very near to capital requirements set by Treasury as a condition of exiting the government’s bailout, meaning that it could be on its way to finally exiting the oversight of TARP. That would be great news for the stock in 2011.
2011 is Not the Time to Chase Growth: Conventional wisdom holds that as profits for a company improve, stock prices move up. Well, in 2010 that has not been the case for many companies. Despite strong earnings growth, most recently with nearly three-quarters of S&P 500 companies meeting or exceeded expectations in the third quarter, many stocks have had a sluggish year. And as year-over-year earnings comparisons become less favorable, that kind of EPS growth may not manifest itself on many corporate balance sheets in 2011. That seems to favor the value philosophy of investing — or in plain English, buying companies that are undervalued instead of chasing companies seeing growth in profits and sales quarter-over-quarter and year-over-year.
Housing and the Economy Will Recover: If you’ve read this far, I assume that you don’t expect to be a subsistence farmer in 2011 using a stack of worthless $20 bills as kindling for your cave fire. If that’s your outlook, obviously you shouldn’t buy ANY stock but rather stockpile canned goods and buy a firearm as your 2011 investment plan.
But if you’re going to buy a stock because you’re hopeful about the economy or you think that housing will finally hit bottom in the next few months after a rough two or three years, Bank of America is a good buy. If you believe entrepreneurs will once again take a shot at success with small business loans or that more consumers will responsibly use debt to finance home repairs or buy a new car, then BAC is a good buy. Call me Pollyanna, but I have hope for 2011 — and that means I have hope for Bank of America’s stock.
To prove my belief, I plan to invest $1,000 of my own hard-earned cash in Bank of America stock . I’m placing a limit order just before the long weekend at $13.30 for 75 shares — totaling $997.50. Adding on my $10 trading charge to get in and the expectation of a $10 charge to get out, that will give me a real cost basis of $13.567 as my break-even.
I don’t expect this play to make me rich. But I do expect my $1,000 investment to do more for me in BAC than a thousand bucks would return in a 12-month CD. Only time will tell.
Check out the other FREE stock picks that make up InvestorPlace.com’s Top 10 Stocks for 2011.
Jeff Reeves is editor of InvestorPlace.com. Follow him on Twitter at http://twitter.com/JeffReevesIP.