by Jeff Reeves | August 4, 2011 5:30 am
Well, so much for putting my money where my mouth is. At midday Tuesday, I placed an order to sell struggling financial stock Bank of America (NYSE:BAC) at $9.45. After a rocky seven months and a roughly 30% slide from my late December buy-in, I said goodbye to my Bank of America stock.
It’s a bitter pill to swallow — not just because I don’t like to be wrong on my individual calls, but because of the bigger story behind why I chose to sell Bank of America on Tuesday.
You see, as part of an InvestorPlace.com feature launched in January highlighting the Top 10 Stocks for 2011, I threw my endorsement behind BAC stock. And in the spirit of practicing what I preached, I bought 75 shares at $13.30 apiece. My reasons were partially because I believed Bank of America wasn’t as toxic as some folks thought — and that a lot of bad news already had been priced into shares. But as you can read for yourself in my initial recommendation, I also was bullish on BAC because I was hopeful 2011 would see a broader economic recovery that would naturally recharge the financial sector as a whole.
Boy, was I wrong.
We just learned that economic growth in the first half of the year totaled less than 1%, according to GDP numbers released this week. Unemployment remains high, and an ugly report from Challenger, Gray & Christmas indicates a 60% surge in layoffs to put us at a 16-month high for job cuts in July. Stocks are plummeting, the debt debacle proves there’s no adults in Washington — it’s hard to be optimistic these days.
Outside of the broader issues, there are some important lessons I hope other investors can learn from my mistake. I have been taking a hard look at Bank of America recently, and here’s how I came to my decision to sell — a methodology I think investors can apply to any struggling stocks in their portfolio.
Start with research based on right now, not when you bought in. Some of my reasons for thinking BAC a value buy still stand. The price/book of the stock is under 0.5 right now, half of many other bank stocks. And as of July 20, Barclays reiterated an “equal weight” rating on the stock — and while it lowered its price target for shares from $19 to $14, that’s still a 40% upside from current pricing (for whatever the “expert” opinion is worth these days). But the momentum of the stock is clearly down, down, down — in stark contrast to an updraft back in December when I bought BAC. On the other hand, the landscape of the financial sector has changed big-time in the past several months. Lending has remained sluggish, continued consumer spending and housing trouble continue to damage overall loan performance and things don’t look to be turning around anytime soon. Oh, and by the way — the stock market in general and broader economy seem ready for a dive, if you believe recent technical analysis.
Revisit your original reasons for buying in, and see what’s changed. On top of looking at the numbers, I also came to realize a big reason for buying in was not holding up — namely, that so-called “core” banking operations such as consumer lending would lift the stock despite obvious mortgage woes. Mid-July brought us reports Tuesday of BAC losses that totaled $9.1 billion for the second quarter, as bad housing loans again erased any other gains Bank of America had made. In fairness, in his Q2 conference call, Bank of America CEO Brian Moynihan touted $147 billion in loans extended and said the bank’s risk-weighted assets dropped by $41 billion. Shows progress, sure. But unfortunately, those gains continue to mean nothing in the face of massive legacy mortgage problems in large part caused by the Countrywide buyout. I finally admitted the idea of BAC’s improving operations eclipsing lingering mortgage troubles was probably a bit unrealistic. (Oh yeah, I had also expected a nice dividend increase at Bank of America … obviously had to eat crow on that, too.)
Ask yourself, “If I didn’t own this stock, would I buy it — at this price — today?” This is the simplest way to wrap your head around what you really think about a stock. When Bank of America was at $12, I shrugged the declines off as short-term troubles. As the stock edged under $11 in July, I said to myself, “Man, once the stock market gets its mojo back in the fall, BAC could bounce back big. Maybe I should buy more!” Now that shares are under $10, I’m worried they could go to $9 or even lower by year’s end. In a matter of weeks, I changed my mind from wondering about doubling down to wondering about how quickly I could get out. Once I became aware of this seismic shift, I knew it was time to bail.
So it’s the end of the line for Bank of America in my book. Accounting for my trading fees to get in and get out, I threw down $1,006.45 in December, and I’m now left with $711.75 for a real-life loss of $294.70. Not chump change, but it won’t bankrupt me.
I suppose the other lesson I hope that can be gleaned from this trade is that I was smart enough to only put in a small amount of “play money” from my brokerage account, and not mess with a sizeable chunk of my retirement funds. In previous articles, I tried to make clear that my call on Bank of America was an aggressive play and should be treated as such — so I hope those of you who followed me into the abyss didn’t take a serious hit.
As for those of you who have been waiting seven months to do so — yes, you, Mr. Martchev, because I’m sure you’re reading — please feel free to comment below. I’m interested to see in the multitude of ways folks can say “I told you so.”
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.
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