Why Bank of America stock (NYSE:BAC) got crushed

It’s clear investors feel like Bank of America’s the ugliest house in a pretty crummy-looking neighborhood. Here are five reasons why.

It’s not often that one of the 30 largest stocks in the country drops 20 percent in a day. That’s what happened to Bank of America Corporation (NYSE:BAC) yesterday, though. The Dow component stock crumpled from $8.17 a share to $6.51 and it shed another 1.5 percent in after-hours trading.

Year-to-date, Bank of America stock is down 51 percent. But the bad news just doesn’t seem to be going away for America’s largest bank holding company. Here are five reasons the stock got crushed yesterday:

1) The mother of all lawsuits. American International Group, Inc. (NYSE:AIG) filed suit against BAC yesterday seeking at least $10 billion in damages for alleged fraud at the bank and at Countrywide Financial, a mortgage origination company that Bank of America acquired in 2007.

2) Did we mention the other lawsuits? AIG is just the latest in a string of high-profile lawsuits against BAC. Freddie Mac, Fannie Mae, BlackRock, Inc. (NYSE:BLK), PIMCO and Goldman Sachs Group, Inc. (NYSE:GS) have also filed suits against the bank. And no one’s sure just how much it’s going to cost BAC to defend itself (not to mention how much it will cost if the bank does have to pay for damages one day).

3) Stock dilution, anyone? Bank of America maintains its stance that the company won’t have to issue more shares in order to cover costs associated with ongoing litigation. If the lawsuits keep coming, though, BAC might not have a choice. Win or lose, lawyers need paid.

4) Jumping ship. Regulatory filings released yesterday showed that hedge fund manager David Tepper of Appaloosa Management LP took a carving knife to his stake in BAC last quarter. Tepper pared off 42 percent of his holdings in the bank, narrowly escaping the guillotine that dropped yesterday. The news of Tepper’s move added fuel to an already fiery sell-off.

5) Downgrade central. In just two trading days, Bank of America shares were downgraded three times. On the heels of downgrades from Standard & Poor’s and Wells Fargo, the most recent thumbs-down comes from CLSA analyst Mike Mayo (per TheStreet). Mayo cut the stock from “buy” to “outperform” (which almost seems meaningless considering the stock’s loses year-to-date). Still, it’s yet another vote of no-confidence for BAC.

All told, yesterday’s 20 percent plunge in Bank of America’s share price wiped out $16 billion. Other banks didn’t fare much better, but it’s clear investors feel like Bank of America’s the ugliest house in a pretty crummy-looking neighborhood. For the year, BAC is down 51 percent. Citigroup Inc. (NYSE:C) is down 41 percent YTD, Wells Fargo & Company (NYSE:WFC) is down 26 percent, and JPMorgan Chase & Co. (NYSE:JPM) seems heroic having lost just 20 percent since the start of the year.



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5 reasons NOT to invest in the RenRen IPO

“The Facebook of China” is probably too tempting of a stock to pass up, but there are still warning signs that warrant acknowledgment before you invest in RenRen’s IPO.

Let me preface this by saying I’ve drank the RenRen Kool-Aid. How could any self-respecting geek turn down the opportunity to invest in the first major U.S. IPO for a social networking stock – especially one that’s being dubbed “the Facebook of China”? Still, there are warning signs that warrant being pointed out (even if you ultimately decide to ignore them in what will probably be a feeding frenzy on IPO day):

1) Competition. As it stands now, Facebook.com is blocked by the Chinese government. Rumors are running rampant that a partnership with Baidu.com, Inc. (NASDAQ:BIDU) – China’s largest search engine – is imminent, though. That could be bad news for RenRen. Who needs a Facebook clone, after all, when you can get the real thing? That said, I’m still not sure Facebook’s willing to turn information on its users over to the Chinese government – particularly if those users end up “disappearing” a few days later. Even if Facebook does decide to move ahead, it won’t happen overnight.

2) How many users do we have? One of the more puzzling pieces of the RenRen IPO is trying to figure out how many people use the site. RenRen itself can’t seem to spit out an accurate number. On April 15, the company claimed monthly uniques grew 29 percent (up 7 million users) during Q1 2011, per the Daily Times. Then, on April 27, RenRen back-tracked saying that monthly uniques were actually up just 19 percent (or 5 million users) during Q1. Weird…

All told, RenRen claims to have 117 million activated users as of March 31, 2011. Sources outside the company including Beijing’s Analysys International had previously reported the site has as many as 160 million registered users. I guess estimates will have to suffice.

3) Accounting abnormalities. “Prior to this offering, we have been a private company with limited accounting personnel and other resources for addressing our internal control over financial reporting,” RenRen writes in its F-1 filing with the SEC. An independent review of the company’s accounting procedures turned up “one material weakness and one significant deficiency.” Namely, the company has “insufficient accounting personnel with appropriate U.S. GAAP knowledge,” no stated plan for investing cash surpluses, and poor management of “treasury functions.” That makes RenRen the sort of company that embezzlers and fraudsters love. And fraudsters aren’t in short supply in China (take, for example, the recent news that the CEO of China’s Puda Coal secretly sold the company and forgot to mention that fact to shareholders).

4) PengYou. Ultimately, RenRen’s biggest competitor might not be Facebook, but rather a homegrown rival in PengYou.com. Two weeks ago, analysts at Goldman Sachs went on the record proclaiming PengYou will “become the dominant social network in China by leveraging (Tencent’s) much larger QQ community and more developed platforms.” Although PengYou launched just five months ago, it’s already the 26th most-visited site in China (check out my post RenRen IPO’s biggest hurdle might be PengYou for more).

5) What are ethics? When RenRen first launched in 2005 as XiaoNei.com, the company labeled itself a “Mark Zuckerberg production.” Zuckerberg, the CEO of Facebook, had nothing to do with the site, of course, but that didn’t really matter to RenRen’s founders. They just made a copy of Facebook and pushed it live. RenRen has something of a reputation for stealing ideas. When Kaixin001.com launched a social networking site in China, RenRen copied it (all the way down to the color scheme) and launched the doppelganger on Kaixin.com. Kaixin001.com eventually won a lawsuit against RenRen, but you can still type in Kaixin.com and get re-directed to RenRen.com. Maybe nice guys do finish last, after all.



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JPMorgan tries to get in before Twitter IPO (JPM)

Wealthy investors will pay just about anything to invest in Facebook and Twitter. JPMorgan (JPM) and Goldman Sachs (GS) are finding ways to make it happen.

Shortly after Goldman Sachs Group, Inc. (NYSE:GS) announced it was selling $1 billion in Facebook shares to its foreign clients, news leaked that JPMorgan Chase & Co. (NYSE:JPM) was raising cash, too, for its so-called J.P. Morgan Digital Growth Fund LP. A few weeks later, the Digital Growth Fund is sitting on a treasure chest filled with $1.2 billion. And it’s looking to deploy that cash for stakes in late-stage, pre-IPO social media companies.

Twitter sits in the crosshairs. Negotiations are ongoing, but it sounds like JPM’s pushing for a minority stake in Twitter, which could value the site at $4.5 billion, according to the Financial Times.

Talk about a steep valuation. Debra Williamson of eMarketer estimates Twitter could generate just $150 million in revenue in 2011, according to the Wall Street Journal. Compare that to Facebook, which could generate as much as $4 billion.

With a valuation around 100 times the company’s revenues, JPM will probably lobby for Twitter to put itself up for sale. A partnership with a site like Google Inc. (NASDAQ:GOOG) could give Twitter the cash and time it needs to roll out a viable, long-term business model. And no one suggests such a thing will be easy.

While Twitter’s got 175 million “registered accounts,” eMarketer believes that only 16 million or so of those accounts are actually active. Still, it’s difficult to put a price-tag on a site that’s among the Top 10 most-visited Web sites in the world (per Alexa). It shares that honor with Web superpowers like Baidu.com, Youtube.com and Google.com.

Twitter’s reach makes it difficult to slap a pricetag on, even if the site’s “only” generating $150 million a year. The fact of the matter is, investors probably won’t care. The hottest companies in the tech sphere are all privately-owned. And we all want a piece of something the rest of the public can’t touch. Wealthy investors will pay just about anything for that honor, and JPMorgan and Goldman Sachs are finding ways to make it happen.



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Three reasons to move back into Bank of America’s stock (BAC)

Bank of America (BAC) has a net worth of $230 billion and a market cap of just $119 billion. After falling some 12 percent over the past three months, the stock is truly starting to look like a value play, even with the specter of negative press having over its head.

Bank of America Corporation (NYSE:BAC) was one of the major banks to benefit from a sector-wide upgrade by Goldman Sachs (NYSE:GS) last week. Goldman Sachs argues that banks “will deliver market-leading earnings growth” in each of the next two years and likely raise dividends soon, according to Investor’s Business Daily. Here then are three more reasons to take another look at BAC:

1) BAC’s stock has gotten beaten down by negative news including speculation that it will be the rogue bank named in an upcoming document dump by WikiLeaks. According to its most recent quarterly report, BAC has a net worth of $230 billion and a market cap of just $119 billion. After falling some 12 percent over the past three months, the stock is truly starting to look like a value play, even with the specter of negative press having over its head.

2) Federal Reserve chairman Ben Bernanke comments over the weekend on a widely-watched 60 Minutes interview showed that the Fed is not opposed to the idea of a QEIII or QEIV. Bernanke argues that fears over inflation are overblown, and he’s signaling that the money-printing spigot isn’t going to be shut off anytime soon. It’s hard for banks NOT to make money in that environment. Negative press doesn’t much matter if Bank of America is making hoards of cash.

3) One of these days, in theory, BAC’s ill-fated purchase of Countrywide Financial for $4 billion just might pay off. Losses are still mounting on the deal, but the bank is trying to meet them head-on by assigning some 20,000 employees to its loan modification division. If they can start generating income from Countrywide loans, they’ll be in a much better position. The controversial move vaulted Bank of America from sixth place to No. 1 in mortgage originations in U.S. They’re a mega bank, and one of these days, the company’s earnings will reflect that.

Top five biggest bank stocks in the U.S. by market cap

The roiling financial markets in the U.S. have knighted new winners and demoted the old guard. What are the top five biggest banks in America?

The roiling financial markets in the U.S. have knighted new winners and demoted the old guard. What are the top five biggest banks in America?

Bank of America Corporation (NYSE:BAC) $132 billion
JPMorgan Chase & Co. (NYSE:JPM) $149 billion
Wells Fargo & Company (NYSE:WFC) $129 billion
Citigroup Inc. (NYSE:C) $111 billion
Goldman Sachs Group, Inc. (NYSE:GS) $72 billion