Are WikiLeaks Rumors Making Bank of America a Better Buy?
Dec 2nd 2010 10:40AM
Updated Dec 2nd 2010 11:32AM
When WikiLeaks founder Julian Assange asserted that his organization's next big leak would involve documents from a major -- and as yet unnamed -- bank, investors in Bank of America (BAC) got nervous. And maybe they had reason to be jittery: Back in 2009, Assange made a comment to an interviewer that he had BofA data in his possession. In response, the bank has denied knowing any reason why WikiLeaks would have any of its documents, but the rumors took its stock for a ride anyway.
The question now is: Have the WikiLeaks worries made BofA stock a better buy?
According to its most recent quarterly report, BofA has $131 billion in cash and a net worth of $230 billion, while its market value is a mere $114 billion. Sure, there are risks in owning Bank of America stock -- including problems with foreclosed mortgages and troubles potentially buried within its recent major acquisitions, Countrywide and Merrill Lynch -- but it threw off $10 billion in cash in the first nine months of 2010 after adding $119 billion in 2009.
How Do Julian Assange and Bob Woodward Compare?
For all his alleged negative traits, Assange is doing something akin to what investigative reporters and prosecutors try to do every day -- hunting up documents that nobody else has so that the public can learn what is really going on inside society's most powerful organizations.
Granted his purpose seems to be somewhat different from that of the reporters and prosecutors. Assange seems to take delight in infuriating powerful people. Investigative reporters are driven by a zeal for changing the institutions on which they're reporting combined with ambition for public recognition. And prosecutors are just trying to get the information they need to win their cases.
But Assange's favored tactic for getting those internal documents is similar to one that reporters use -- he tries to get disgruntled employees to provide them. In one respect, Assange differs from most reporters and prosecutors: He doesn't try to craft a narrative for the raw materials he posts: Somewhat like Bob Woodward, Assange wants to let the raw materials speak for themselves.
Granted, Woodward and Assange have different ways of getting their raw materials. Woodward actually interviews people with power and transcribes the interviews into his books. But both prefer to leave it to their readers to try to make sense out of the facts. On the other hand, while Woodward may often aggravate the powerful, his character is rarely questioned: Assange, by contrast, is wanted by Interpol for questioning in Sweden regarding accusations of rape.
Has BofA Already Aired Its Dirty Laundry?
I'm hard pressed to imagine anything that Assange could leak about Bank of America that it wouldn't be in the public's interest to know. After all, the executives of the nation's biggest banks have demonstrated that they're willing to sell flawed financial products to a gullible public, then demand that the government allow them to use taxpayers' money to pay themselves huge bonuses even as those financial products lose money for bank shareholders.
But in that light, what internal documents could be released that might threaten the survival of BofA? Could anything be revealed that would give Americans a lower opinion of their financial institutions? The case has already been made that the CEO of Countrywide -- later acquired by BofA -- was worried about the lousy mortgages his bank was issuing. But he kept telling investors all was well even as he dumped $132 million in shares -- just before the subprime mortgage mess escalated into the global financial crisis. Bank of America's other recent major acquisition, Merrill Lynch, has already been exposed as a Goldman Sachs (GS) wanna-be whose CEO, Stan O'Neal, gorged on subprime mortgages without hedging his bet. He ended up pocketing $319 million as a reward for destroying this once-great firm.
Still, even though much of BofA's troubles are already public knowledge, that doesn't mean that shareholders have nothing to worry about. After all, BofA boosted its allowance for loan losses by 17% to $43.6 billion and its provision for credit losses is $23.3 billion -- although that's down 40% from the year before. It also holds $479 billion in long-term debt, and fully 94% of its assets are Level 2 ($2.569 trillion) or Level 3 ($84 billion) --meaning that there is no liquid market for them and their values are estimated. It also faces dozens of lawsuits in which it expects to lose between $400 million and $1.9 billion.
Nevertheless, after rising 193% from its low of $3.95 a share in February 2009, BofA stock sat at $11.57 at 10:15 Thursday morning. If its earnings grow as much as expected, that's still a pretty cheap valuation. Specifically, the bank is expected to boost earnings 37% in 2011, while its stock trades at a measly forward P/E of 7.6. This price/earnings to growth ratio (PEG) of 0.2 is far less than what I view as a fair value of 1.0.
If you're worried by the possibility that WikiLeaks will air BofA's dirty laundry sometime soon, or that the market has underestimated the bank's other considerable risks, stay away from the stock. Or you could look at those worries as a good opportunity to pick up BAC shares at a low price.