Bank of America (BAC): Due for a Rebound or Just too Risky?

On Tuesday’s Mad Money, Jim Cramer discussed the technical versus the fundamental reasoning behind buying Bank of America (BAC). Cramer generally relies much more heavily on fundamental analysis, as does Ockham, but we both recognize that there is value in reading the charts correctly.’s technical analyst made the case–while Bank of America was languishing below $4 per share–that the bank was actually beginning to look attractive and could double in short order. That call looked genius today, but how will it play out over the longer term? Cramer discussed his fundamental perspective:

“… The real takeaway, he thinks that Bank of America can double. And that the S&P’s got a big move ahead of it. These are pretty big bold calls. What I do think of them?

The market’s in the hands of the banks and the banks are in the hands of Washington… And I think that they could also end the tyranny of the shorts by bringing back the up-tick rules… if that happens then Bank of America is your ticket to the big mark-to-market show, right? Although, I would much rather buy it on a pullback rather than after today’s big move, but if the stock could go to six or higher, if they just shave mark-to-market and make it mark-to-market light. This means more to Bank of America than any of the others.

Oh and don’t even talk about how high this one could go if they bring back the up-tick rule and ban militia short-selling…Bottom line, the charts say that Washington will save the banks generally and Bank of America specifically, on the whole I think it’s a risky call…But if you have faith in the administration, by all means.”

Graph 1Cramer does a good job of showing that there is substantial upside in Bank of America, if certain conditions are meet. The “if” of reinstating the up-tick rule would give the bank a measure of protection against the short sellers that have ravaged the financial sector. Also, he said that Bank of America could benefit from a repeal, or adjustment, to mark-to-market accounting rules. Perhaps the biggest “if” was if you believe the administration will be able to turn things around. No one knows how things will turn out, but in the short term the banks and the economy will likely go in the same direction.

Bank of America: Due for a Rebound or Just too Risky?

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Ockham Research is an independent equity research provider based in Atlanta, Georgia. Security analysis at Ockham Research is based upon the principle known as Ockham's Razor, named for the 14th- century Franciscan friar, William of Ockham. The principle states that a useful theory should utilize as few elements as possible, because efficiency is valuable. In this spirit, our goal is to make the investing environment as simple and understandable as possible, yet no simpler than is necessary.

We utilize this straightforward approach to value over 5500 securities, with key emphasis given to the study of individual securities' price-to-sales, price-to-cash earnings and other historical valuation ranges. Our long term value investing methodology is powered by the teachings of Ben Graham and it has proven to be very adept at identifying stock prices that are out of line with fundamental factors.

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