Friday, September 14, 2012

Bank of America (BAC): On the Road to $20, Part I

Warning: This is a long one!  Please try to hang with me. 

Let’s get started.

Preliminary Notes

In January 2012, I tried to make the case for investing in BAC at Seeking Alpha.  In my two articles published that month, I provided investors with a price target range of $15 to $20 by 1/18/13.  Since that time, my views have not changed.  I’m sticking with BAC and will elaborate more below.

Over the past couple of years, I have closely observed many individual investors.  So, I have a pretty good feel how most tend to operate.  I figured most probably would not stick with BAC over the long haul.  Not claiming to be a know-it-all - that’s not my thing.

But what I can tell you this with absolute certainty: the significant majority of investors do not have the patience required for investing.  And when I started investing independently, I, too, was terribly impatient.  But now, I’m armed with nearly a decade of experience investing money.  Needless to say, I know when to sit tight.  Like every investor I have met, I’ve made [a ton of] mistakes early on and incurred more than my fair share of losses.  But losing money is the best and most painful way to learn how not to lose.  So in my quest to become a successful investor, I have, without question, done things the hard way.  But going that route – the hard way – I have learned the importance of patience. 

It should be evident to most of you; I have also learned how to identify excellent opportunities - consistently.  I seek out what I call the Big Moves.  And over the past several years, I have established a pretty impressive [public] track record.  Don’t take my word for it; spend some time reviewing my articles and recommendations published at Seeking Alpha.  Use a historical price chart and pay attention to the dates.  When it comes to investing, results matter most.  My results speak for themselves.

Brief Background

March 2010:  I launched my site, Rx Investors.  Admittedly, I didn’t have a clue what to expect or what it would take to help myself and other investors to achieve our goals.  Today, I am very fortunate to be working with some good folks on the site.

November 2011:  I [finally] launched the private investment company, JM Hall & Company, LLC (formerly HIRX, LLC).  I actually drafted the business plan for the company in the first half of 2008.  Later that same year, a close attorney friend helped me with the company’s initial operating agreement.  Fast forward three years, another attorney friend, who I met on the site (Rx Investors) helped me by reviewing and revising the agreement prior to launch.  Needless to say, this journey has not been easy and required a lot of time and patience.

The company’s investors consist of a small and carefully selected group of gentlemen from the site, who I have worked with closely over the past couple of years.  With exception of my close friend, the other gentlemen (like you all) discovered me through my work at Seeking Alpha throughout 2009 to 2012.  Again, I have been very fortunate to meet these gentlemen.  No BS.  I am grateful for their support and honored that they all place their trust in me. 

I am also thankful for Seeking Alpha, who provided me with an excellent opportunity, to introduce myself to other like-minded investors.  That opportunity has allowed me to launch my own site (Rx Investors) as well as a small private investment company.  One day, I might share the entire story with others.  I believe many of you might actually find it interesting.  I also think other entrepreneurs, working to take their own ideas and transform them into growing businesses, may find the story helpful.

June 2012:  I launched this relatively new blog under my name, Justin M. Hall.  Why?  Well, over the past year or so Seeking Alpha has grown substantially and they’ve made some significant changes on their site.  And from this contributor’s perspective, it has become a bit complicated.  With SA’s success, the number of contributors on the site has increased dramatically.  In my view, the quality of the content and recommendations issued on the site has also fallen.  Don’t get me wrong here.  Many of SA’s contributors are talented writers / commentators.  But when it comes to investing money, far too many of SA’s contributors lack any real or meaningful experience.  Thinking logically and writing effectively and persuasively does not guarantee success.  With most stocks and ETFs, good arguments can often times be made on both sides, long and short.  But at the end of the day, results are the only thing that really matter.

The key to successful investing is getting it right.  Take your time when evaluating a commentator.  Make them earn your trust before you jump on one of their ideas.  Look for an established track record.  Do they post the results of their recommendations, good and bad?  If not, why?  Does it appear that they help others make money with their money?  Can you tolerate the risk that is involved?

Don’t lose focus.  As an investor, your primary goal is to make money with your money.

I launched this blog for the select few who actually find my articles and recommendations helpful.  My approach to investing does not work for everyone.  I seek out what I believe to be big opportunities in high risk environments.  If you’re looking to make a quick buck every trading day, then some (not all) of my recommendations may not be a good fit for you.

While I genuinely appreciate the excellent opportunity that Seeking Alpha provided me, I’m going to try to stand on my own two feet.  I’d prefer to freely share my views with you all and not be concerned with what the Seeking Alpha editors might think.  More importantly, I’m pretty darn good at the work I do.  So, I think the move makes sense.

So if you give a damn about what I have to say about stocks and ETFs and have found my past recommendations helpful then I believe that you will not only enjoy this blog, but you might even make a little money.

Quick Note on Politics

For those of you, who do not know, I share the views held by pro-business fiscal conservatives, i.e. Regan conservatives.  This means, I tend to support and vote for Republicans.  I am also well-versed in presidential politics and political campaigns.  Over the past 20 years, I have closely followed and carefully observed several presidential campaigns.  Years ago, I even worked for a couple of presidential campaigns.  I am a student of history and have studied our past Presidents and their campaigns.  For some odd reason, I enjoy the battle of ideas.

If, for whatever reason, you don’t share my political views (fiscal conservative), that’s ok.  Just because your views are dead wrong doesn’t mean we can’t be adults and get along with one another.  Even though we may not agree on everything, I will try my best to be respectful of you and your views, so long as you extend me that same courtesy.  It’s simple stuff.

In stock talks at Seeking Alpha and entries on this blog, I may give you my take on political issues, especially when I feel that such issues could potentially have an impact on our money and investments.

On that note, let’s take a look at BAC.

The Importance of the 2012 Election

For U.S. banks, both large and small, the outcome of this particular election is very important.  If all of the new rules under Dodd-Frank (and Basel III) are eventually implemented and enforced, many small American banks will go the way of the do-do bird.  Banks will consolidate along with capital and power.  Competition within the sector could come to a halt and thereby limit options and alternatives for Americans.  At the end of the day, excessive regulation always hurts the little guy.  As we learned from the Crash of 1907, having too many banks creates a complicated system and thereby presents systemic risk.  However, having a few banks that are too big to fail, as evidenced by the 2008 financial crisis, could potentially bankrupt the country.  So, a reasonable amount of competition within the banking industry seems to be the best solution.

Interestingly, both large and small banks don’t seem to care much for Dodd-Frank.  Many argue the 2,300 pages of legislation could eventually make it very difficult for both people and businesses to obtain credit.  If money isn’t moving, things aren’t happening.  If we try to legislate all of the risks associated with people and businesses away, our economy won’t grow.  If people and businesses can’t take risk and try to grow, jobs won’t be created.  And the folks with jobs will continue to pay for the folks without jobs.  Whether you’re a taker or a maker, this is not good for anyone.  People and businesses need to work.  People and businesses need opportunity and must be willing to assume risk.  Taking risk isn’t a bad thing.  The minute we buy into that and stop taking risks, we are in deep shit.

If Romney is elected in November, many of the regulations under Dodd-Frank will likely be modified or eliminated.  In part, the removal of red tape could potentially help revive our economy.

Unwinding the Dodd-Frank Disaster

In the series of tables below, I have outlined (1) a comparison of Obama’s and Romney’s proposals, (2) further details of Romney’s proposals, and (3) some of the existing legislative proposals.

Obama v. Romney

Executive Proposals
Details of Romney’s proposals are provided in the table below.

Legislative Proposals
If Republicans take control of the Senate and House of Representatives after the 2012 election, then Congress will target specific areas of Dodd-Frank – those that they can achieve the most success.  Congress will identify the laws that do not work and / or may cause harm to the economy.  Listed in the table below are parts of Dodd-Frank that Congress could possibly modify or eliminate in 2013 and beyond.

Can Romney Win?

University of Colorado
On August 22, 2012, the University of Colorado released their findings:
A University of Colorado analysis of state-by-state factors leading to the Electoral College selection of every U.S. president since 1980 forecasts that the 2012 winner will be Mitt Romney. 
The key is the economy, say political science professors Kenneth Bickers of CU-Boulder and Michael Berry of CU Denver. Their prediction model stresses economic data from the 50 states and the District of Columbia, including both state and national unemployment figures as well as changes in real per capita income, among other factors. 
“Based on our forecasting model, it becomes clear that the president is in electoral trouble,” said Bickers, also director of the CU in DC Internship Program. 
According to their analysis, President Barack Obama will win 218 votes in the Electoral College, short of the 270 he needs. And though they chiefly focus on the Electoral College, the political scientists predict Romney will win 52.9 percent of the popular vote to Obama’s 47.1 percent, when considering only the two major political parties. 
“For the last eight presidential elections, this model has correctly predicted the winner,” said Berry. “The economy has seen some improvement since President Obama took office. What remains to be seen is whether voters will consider the economy in relative or absolute terms. If it’s the former, the president may receive credit for the economy’s trajectory and win a second term. In the latter case, Romney should pick up a number of states Obama won in 2008.” 
Their model correctly predicted all elections since 1980, including two years when independent candidates ran strongly, 1980 and 1992. It also correctly predicted the outcome in 2000, when Al Gore received the most popular vote but George W. Bush won the election. 
Rasmussen Reports
Rasmussen’s daily presidential tracking poll from Thursday, September 13, 2012 indicates the post-convention bounces are already priced in.  After all of the dust has cleared, it looks like Romney has regained the lead - for now anyway.
The Rasmussen Reports daily Presidential Tracking Poll for Thursday shows Mitt Romney attracting support from 47% of voters nationwide, while President Obama earns 46% of the vote. Three percent (3%) prefer some other candidate, and five percent (5%) are undecided. 
This is the first time in a week that Romney has held even a single-point advantage.  Romney is now supported by 18% of white Democrats. 
Romney has solidified the GOP vote and holds a 77-point lead among Republicans. That’s slightly larger than Obama’s 72-point advantage among Democrats. 
When “leaners” are included, it’s Romney 49% and Obama 47%. Leaners are those who initially indicate no preference for either candidate but express a preference for one of them in a follow-up question. 
Perhaps most significantly, Republicans are once again more engaged in the election than Democrats. Forty-nine percent (49%) of GOP voters are following the race on a daily basis. Among Democrats, just 42% are that interested. Throughout 2012, Republicans have consistently held the enthusiasm advantage. However, for a few days following the Democratic National Convention in Charlotte, the president’s party caught up to the GOP on this important measure of potential turnout.
So, can Romney win?  With unemployment at or greater than 8% over the past 43 months, I think most people will be willing to give Romney a shot.  At this point, I’d say Romney, a successful businessman, poses far less risk to our economy than Obama.  And I think most people get that.

Stick with BAC!

With QE3 now behind us, we look forward to Q3 2012 earnings and the presidential election.

BAC reports their Q3 2012 results on Wednesday, 10/17/12, just before the October options expiration on 10/19/12.  With the housing market recovering, BAC could have a solid Q3.

The election is scheduled for Tuesday, 11/6/12.  If Romney is named the winner, BAC, which is still terribly undervalued, could take off.  At its current share price, I don't believe the unwinding of Dodd-Frank has been priced in.

If BAC’s Q3 earnings report shows signs of growth AND the red tape from Dodd-Frank is removed, then I think the stock could trade at 1x book value by the first half of 2013.  That’s about $20 per share.  

That said, I am still maintaining my 1/18/13 target range of $15-$20 for BAC.

Right now, I prefer BAC LEAPS, namely near-the-money calls.  If you don’t like options, then I recommend playing the stock directly.  Investors should buy and build positions in BAC over time.  Be sure to set reasonable trailing stops on both shares and call options.

I own various long-term positions in BAC.

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