Dick Bove is Bullish on Bank of America; Should You Listen?

Dick Bove of Rochdale Seucirities is being quoted around the blogosphere for his love of Bank of America

, JPMorgan

, and Citigroup

, which he called risky plays with strong potential thanks to "a very strong increase in deposits, in lending, and in profits." In an

, Bove predicted a strong rally in financial stocks due in part to the fact that many banks are trading below their book values. He especially sees value in Bank of America, which he gives a buy rating thanks in no small part to its jump in commercial banking activity. We've been here before. In

, the Rochdale analyst defended the bank's fundamental value after Dan Fitzpatrick wrote in the Wall Street Journal that the bank is facing regulator scrutiny that could result in a public enforcement action. That proved to be far from the truth, since the company

its tier 1 capital ratio by over one percentage point to 9.9% in a surprise move that helped the stock to rally over 7% on Thursday from the previous day's close. Bove has been expecting a rally in banks for a while. Pointing to false expectations about the value of CDS contracts, the analyst suggested in early October of last year that traders were suffering from a bout of "hysteria" and that the banks were substantially undervalued. He believed that investor fears were overblown, with worries that the banks would be nationalized or housing would crash again would bring down the banking system. Bove also dismissed worries that banks' assets were overvalued and the banks were actually bankrupt, an old story and favorite line at

. For a while, investors listened to Bove, and Bank of America rallied in October, only to crash in November on bearish headlines around two themes. The first was continued worries that European bond markets would continue to see yields rise as the ECB refused to provide significant relief, causing eurozone economies to slump into an official recession. Secondly, investors were concerned about Bank of America itself. With Bank of America's sale of several interests, such as its stake in China Construction Bank (HK: 939) and Australian mining venture Adamus Resources Limited

, it seemed that Bank of America was losing too many assets too quickly. As a result, the stock began falling in November and December and hit its 52-week low before Christmas. Now Bank of America is rallying again, flirting with the $7 per share price point thanks in part to its surprising jump in tier 1 capital and earnings results on Thursday that exceeded analyst expectations. Thanks also to jumps in Goldman Sachs

and Morgan Stanley

, which also surpassed analyst estimates, there is a newfound confidence in both investment and conventional banking that is helping the share price of the big banks climb from low levels at the end of last year. Now investors need to see if it will last. Last time, Bove was proven right about Bank of America in the short-term only to see the stock price fall. That may happen again, since Bank of America CEO Brian Moynihan intends to sell off further assets in his drive to cut $50 billion of the bank's total holdings. Announcements of further sell-offs might make investors again wonder if Bank of America is on the road to recovery, or if it's contracting. Even if it does contract in revenue, Bove's point still stands that the stock is trading far below book value. Thus Bove's point that bank stocks will recover to at least book value "if we're going to see any recover in the economy" is a fair one. However, Bank of America may remain a risky play if a new wave of hysteria washes over Wall Street.