Bank of America Above $7

 

The stock of�Bank of America (NYSE:�BAC) crossed briefly the $7 mark in early morning trade, gaining close to 40 percent since the middle of December when it dipped below $5. BofA joins the early January rally in financials, which have lost 17.14 percent of their value last year�measured by the performance of the Financial sector SPDR Fund (NYSE:XLF). Does this run-up make the stock a buy?

As we did write in a previous piece, BofA is for aggressive investors who may want to take their chances trading the stock. Conservative investors may want to stay away until the bank leadership addresses the bank�s structural problems�correcting the two strategic mistakes of the past that end up costing the bank dearly: the purchase of Countrywide Financial and that of Merrill Lynch.

The purchase of fast-growing mortgage company Countrywide Financial supposed to be the quick ticket into the mortgage market, a natural area to expand for a bank with plenty of funds to lend. As it turned out, the purchase of Countrywide Financial was the poison bait for bank of America, as the finance company was at the poster child of the excess in the mortgage market during the preceding years�not to mention that the price paid was too high for a company with such huge liabilities.

The purchase of legendary Merrill Lynch was supposed to be the quick ticket of expanding in another market investment banking � again, another natural area for a bank to expand in the era of financial deregulation. As it turned out, this movement wasn�t terribly good either; Merrill Lynch had its own liabilities, and its own aggressive culture that it didn�t blend well with Bank of America�s conservative one.

Now, four years later, these strategic mistakes come to haunt the bank. It is still in business thanks to generous support from American taxpayers, its management fights the one lawsuit after another, and its stockholders are bleeding left and right.

The bottom line: What makes a broken stock a long-term buy isn�t just its price, but a clear strategy that addresses the root causes that drove the stock to that price, which I don� see at this point.

Disclosure: I am long BAC. I am an active trader and may switch positions at any time.