Imagine you’re the CEO of a company, and you just agreed to pay a $16.65-billion settlement for unethical behavior.
The settlement stemmed from a scheme your company hatched to bilk unsuspecting investors out of their hard-earned money.
Now, imagine that your company’s stock price traded higher on the news.
Say what? Well, it just happened.
Stranger still, the stock in question is headed even higher. Much higher.
The stock, of course, is Bank of America (BAC).
The beleaguered bank recently agreed to pay $16.65 billion to resolve allegations that it sold toxic mortgage-backed securities, and lit the fuse on the financial crisis.
It’s the largest settlement between a single firm and the U.S. government in history.
The settlement breaks out as follows…
- Bank of America will pay a $5.02-billion civil penalty to the Department of Justice.
- Bank of America will part with $4.63 billion in compensatory remediation payments.
- Bank of America will push $7 billion toward consumer relief initiatives, like mortgage-reduction measures for folks struggling to pay their bills.
By my count, this is the 43rd such settlement Bank of America has paid in regards to its involvement in the financial crisis.
Back in March, the bank paid $9.3 billion to settle claims that it sold Fannie Mae and Freddie Mac faulty mortgage bonds, bringing its settlement tally to north of $50 billion. It’s also worth noting that the bank’s legal fees run into the billions of dollars, as well.
Instinct Oftentimes Trumps Fundamentals
Ironically, shares of BP (BP) plummeted yesterday when a judge ruled that the company had been negligent in the events leading up to the oil spill in the Gulf of Mexico.
Some $9 billion were erased from the company’s market capitalization in a single day, which is exactly the kind of market reaction you’d expect from such negative news.
In stark contrast to BP, however, Bank of America shares didn’t budge on news of its culpability during the financial crisis.
So, if you were curious which bank suffered the most collateral damage from the mortgage and foreclosure debacle, look no further than Bank of America.
Nonetheless, shares haven’t declined in the face of these latest two settlements. When a stock can take a $25-billion, one-two punch in the face – and not flinch – it’s worth a closer look.
The Next Move Is Higher…
So why am I bullish on a stock that’s typically regarded as the most hated among main street America?
There are a few reasons, actually.
For starters, insiders suggest that this latest settlement is the last of the majors to hit the bank, which CEO Brian Moynihan has since confirmed.
More importantly, however, the settlements have already been priced into the stock. Had they not been, we would’ve seen a ton of selling when the news hit. But we didn’t.
In fact, hedge funds bought Bank of America shares in the last quarter to the tune of $1.02 billion.
Bottom line, the bank recently resubmitted a scaled-down stress-test plan to the Federal Reserve after its initial submission revealed an error that led to an overstatement of $4 billion in capital.
This latest submission resulted in no changes to the bank’s reported regulatory capital ratios for the first quarter of this year, and a change of less than 0.01% for the third quarter of last year.
On top of that, the bank announced that it just successfully raised $3 billion in preferred stock.
If you’re looking for a stock with plenty of upside with a strong floor under shares, Bank of America definitely fits the bill.
Onward and Upward,
Founder, Wall Street Daily