5 Bank Stocks That Won't Bankrupt You or America (Update 1)
Updated with Fannie Mae's rather nasty comments on Bank of America, in the mortgage giant's announcement of its fourth-quarter net loss.
NEW YORK ( TheStreet) -- When considering the highest-flying bank stocks of 2012, it pays off to consider the level of risk you feel comfortable with.
By now, most investors know that Bank of America (BAC) is one of the biggest winners this year, returning 45% through Monday's close at $8.04. But keep in mind that the shares fell 58% in 2011, throttled by mortgage risk. If you had held the shares for the 52-week period ending Monday, you would have lost 43% of your money.
In addition to the recent mortgage foreclosure settlement which at least gave some clarity to the exposure Bank of America faced from federal regulators and state attorneys general over sloppy foreclosure filings, the company's shareholders got a piece of good news on Monday. The U.S. Court of Appeals for the Second Circuit issued a unanimous opinion that BofA's contested $8.5 billion settlement of Countrywide mortgage putback demands with private investor, should be decided upon, in New York State court.
Credit Suisse analyst Moshe Orenbuch said the decision was "a positive for Bank of America in that the settlement is more likely to be finalized according to its original terms," which were arrived at, last June. Since the settlement was "structured under New York State law," Bank of America can settle with the entire trust, rather than with individual investors. Bank of New York Mellon is the trustee that agreed to the original $8.5 billion settlement.
Assuming the settlement is finalized, one more piece of Bank of America's mortgage puzzle will be solved, and since the company already set aside the settlement money last June, it is baked into the share price. Finalizing the settlement will provide significant clarity to Bank of the America's entire mortgage risk picture, and likely lead to a reversal of the recent slew of earnings estimate cuts among analysts following the company.
Orenbuch rates Bank of America "outperform," with an $11 price target. At Monday's close, Bank of America's shares traded for 0.7 times tangible book value, according to HighlineFI, and for 11 times the consensus 2012 earnings estimate of 71 cents, among analysts polled by Thomson Reuters. The consensus 2013 EPS estimate is $1.20.
On Wednesday, Fannie Mae (FNMA) in its fourth-quarter press release took aim at Bank of America, saying that "the seller/servicer with which Fannie Mae has the most repurchase requests outstanding, slowed the pace of its repurchases" during the fourth quarter. "As a result of Bank of America's failure to honor its contractual obligations in a timely manner," Fannie said, "the already high volume of Fannie Mae's outstanding repurchase requests with Bank of America increased substantially."