Taking Stock: Berko advises investor to bank his gains on Bank of America shares

Malcolm Berko: Bank of America a huge company, but not a wise investment, Berko says.
Published: July 7, 2013
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But BAC makes money!

This year, BAC should earn 94 cents a share on $91 billion in revenues, and next year, it could be $1.24 on $92.4 billion in revenues. BAC has more constantly moving parts than a warehouse of Rubik's cubes. BAC is like a huge vampire squid with its leaching tentacles, slithering into anything that smells of money.

BAC is so huge that if it loses a tentacle or two, neither Moynihan nor his board will have time to discover the loss because it'll grow back in a few months.

But BAC's biggest risk over the coming couple of years is a $2.2 trillion mortgage portfolio, which, in blind lust, was purchased from the crooked Countrywide. Countrywide was run by an allegedly corrupt Anthony “Big Tuna” Mozilo, who ought to be boiled in oil, branded and then imprisoned. This acquisition and that of a bankrupt Merrill Lynch in 2008 resulted in a government bailout.

The liabilities from these deals still suck marrow from BAC's bones.

Moynihan, who inherited these problems as CEO, underestimated the potential damage, and his rocky leadership has failed to inspire confidence. BAC's various subsidiaries are too slowly returning to health, which is why the shares trade at depressed levels compared with its peers.

However, the bank has an adequate balance sheet, with $26 billion in loan loss reserves and $135 billion in tangible common equity.

A financial institution of this sprawl and complexity is inherently difficult to manage. BAC's huge size can provide economies of scale, but economies become counterproductive when the head can't figure out where the feet are going.

This bank seems to be unmanageable, and that's bad for shareholders, the public and the economy. There's been talk that regulators will decide to break up this clumsy bank to prevent implosion. Meanwhile, the Street's consensus suggests that BAC shares will not trade at more than $16 this year. And you might wish to preserve that huge profit and put the money in a dividend growth stock.

Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775, or email him at mjberko@yahoo.com.