Friday, June 03, 2011

Tom Brown's BofA Call

I happened to catch long time bank analyst, now, a sector portfolio manager, Tom Brown's appearance on Bloomberg television yesterday.

During his interview, Brown disclosed that for the first time in years, his fund has gone long BofA equity.

When questioned on his decision, Brown outlined his view of the bank's near term future under CEO Brian Moynihan. Essentially, Brown sees Moynihan shrinking the bank, which he believes is a good thing.

Running through the sort of micro-analysis that people like Brown do, he rattled off EPS and P/E numbers, claiming that the share price should double sometime in the next 18-24 months.

Wow. That's some performance!

If you look at the nearby price chart of BofA and the S&P500 Index, you can see this would be new territory for the bank's stock price performance.

Over the past two years, it's essentially been flat. Over five years, it's down nearly 80%. Is Tom Brown making a simple timing bet that BofA will eventually regain its valuation at roughly pre-crisis levels? A variant of the old P/E target approach, whereby one treats P/E as a cause, rather than an effect of a company's fundamental performance?

It seems like a pretty tall order to me. Typically, shrinking firms don't perform consistently well for very long. And total returns of 100% over two years seems heroic. Especially when it's supposed to magically result from a change in the firm's direction, rather than something like better execution of a good strategy.

Personally, I would be surprised if my equity strategy selection process even includes a bank anytime soon. I know it certainly wouldn't be including BofA by the time Brown predicts the firm's stunning performance success.

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