To sum up the fundamentals, here is a note from Credit Suisse:
"Consumer real estate credit quality trends are demonstrating some signs of stabilization. Given recent trends, mgmt indicated that expects the peak in net charge-off’s to be approaching. Residential mortgage net charge-offs stabilized in 2H’09 ($1.2bn in 4Q09) and delinquencies have remained flat for the last several quarters. While the home equity portfolio losses improved in 4Q09, mgmt indicated that it expects losses to bounce around for the next several quarters before there is a sustained q/q improvement. The company remains positioned for the future. Bank of America Home Loans generated $5.2 billion in pre-tax pre-provision profits in 2009. However, the segment was pressured by elevated credit costs with provision expense of $11.2 billion in 2009. However, given BAC’s origination market share of nearly 23%, the company remains well
positioned for longer term success. While there will be ongoing higher expenses for fully documenting each borrower, the company will benefit as credit costs and expenses related to workouts wane, as well as benefits from scale efficiencies (with the integration of the CFC platform).
Maintain Outperform Rating. The risk/reward on the shares is attractive at current levels. BAC is the cheapest of our large cap banks on “normal” earnings trading at about 5.5 times (vs. large cap peers at 7x) and furthermore will build book value rapidly during 2010. Furthermore, we are encouraged by the slowing growth in non-accruals. Our price target of $21 equates to 1.5 times forward tangible book value and 7.9 times normalized earnings."
As for technicals, the stock has tremendous support at $14. I believe a break below $14 would require significant market moving event, which I don't expect on the horizon. Therefore, I like the following bullish risk reversal:
- Buy to open Aug $11 puts
- Sell to open Aug $14 puts, for a net credit of $0.82- Use the proceeds from above to buy to open Aug $17 calls for $0.82 debit
Since the trade is done for net cost of $0 (except the margin requirement for selling the bull put spread), the trade doesn't incur any losses unless the stock is below $14 by Aug expiration. As mentioned earlier, I expect $14 to hold which is tremendous support. The profit potential on the upside is unlimited. The daily chart and trade P&L is attached. I like the odds.
Good luck!
