market folly

Bruce Berkowitz of Fairholme Capital has put together a slideshow presentation on Bank of America (BAC) that outlines his investment thesis on the company.

Just yesterday, we shared Berkowitz's investment thesis on AIG (his largest holding). Today, we shift to his third largest position as of the end of the year: Bank of America.

Here are his main reasons for owning BAC shares:

- Trades at less than one-third book value

- Core businesses generating 1% return on assets and 10% return on equity

- Fortress balance sheet

- Largest US retail deposit market share and serves one in every two US households

And the last one is a kicker: "essential to global economic security." You want too big to fail? You got it.


Berkowitz sees a 20% implied annual return on his investment in Bank of America, which he argues is a reasonable return since you're buying BAC for less than half of book value. He also highlights trends improving in BAC's favor: a strengthening job market, a stabilizing housing sector, and improving fundamentals in the financial sector.


Margin of Safety: Fairholme's leading man says that $7 of BAC shares buys you something that's worth $20+.


Thesis Simplicity: Yesterday, we highlighted Sam Zell's advice on investing where he said something is only worth buying if you can explain the thesis in a few sentences.

Regarding BAC, Berkowitz writes, "Its earnings power has been disguised by the intense provisioning for loan losses. But when the provisioning gets back to a normal level, you'll start to see that incredible earnings power come down to the bottom line. And it's as simple as that."


Embedded below is Bruce Berkowitz's slideshow presentation on Bank of America:



For other presentations from Fairholme, check out Berkowitz's AIG thesis & presentation.

And to learn about his approach as an investor, head to Berkowitz's checklist for investing.