Check Out A Hedge Funder's Huge, Bullish Case For Buying Bank Of America

bank of america presentation

Kai Shih of Shih Investments recently pitched Bank of America (BAC) stock at the Vitaly Katsenelson’s Value-X Vail investing conference.

Shih’s thesis is right in the title of his presentation: BofA: “Not the huge, risky mess you think it is.”

Shih took a look at the potential downside from two major risks to BAC stock:

  • Further losses from ongoing mortgage litigation issues, stemming in part from Bank of America’s woeful acquisition of Countrywide
  • Contagion from the euro crisis and exposure to troubled economies in the periphery of the eurozone

In the presentation, Shih estimates the potential losses for Bank of America from these risks and compares them to earnings growth forecasts for the company over the next two years.

His conclusion: Bank of America may be a good value play.

Note: Thanks to Vitaliy Katsenelson for allowing us to feature this presentation.

BAC is undervalued by traditional metrics

Three major issues are keeping the price down

Litigation costs are unclear but reserves are large

There's no question that the mortgage-related risks are large. Here are three known ones

Fannie and Freddie may or may not become more aggressive with claims against BAC

There is litigation risk from private investors

There are many different players in this category

BAC has received a favourable ruling from a California judge

It's generally too late for additional big federal lawsuits against BAC

State claims against BAC are hard for plaintiffs to win

Losses from private investor lawsuits might be $8.5-11B

There are litigation risks against BAC from mortgage insurers

The court generally favours insurers like MBIA

There are risks to BAC from the euro crisis

BAC has been reducing exposure to the peripheral eurozone

BAC could conceivably take business from struggling European banks

But, BAC could lose $3.5B from peripheral country exits from the euro

Here is what the numbers could look like if euro exits happen

Here are total loss estimates from mortgage and Europe risks

Earnings forecasts double in 2013 from 2012

Analysts forecast robust earnings growth for BAC

BAC has a big commercial business

BAC could do 'very large' share buybacks

The bullish argument is that BAC will execute buybacks

BAC seems to have a handle on new capital requirements

BAC should reduce long-term debt

Here is the credit quality of BAC's various portfolios

Accounting issues should be clearer now than in 2008

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