When a sector gets hit by negative news and lingering doubts, the good companies come down in value as well as the not-so-good companies. It's a "shoot first, ask questions later" scenario. Well, the time has come to step up to the plate and load the boat on Bank of America (NYSE: BAC). The story and the opportunity are just too tempting to pass up and this story needs to be told!

It is very important that investors clearly understand the differences between "pure" mortgage plays, leveraged mortgage plays and a giant, diversified bank. Several pure mortgage players have been hurt worse than expected. They are one-trick ponies with little diversification in their earnings and revenue structure, and have either severely reduced their earnings outlook or have even closed their respective doors.

Not only are questionable past mortgage practices at the forefront, but these smaller institutions DO NOT HAVE THE BALANCE SHEETS to carry these loans on their books -- they must package and re-sell them. With pricing on mortgage paper out of whack, these smaller, pure mortgage players are suffering from a double whammy.

The leveraged plays popular with hedge funds have come back to roost in a vicious manner. Bear Stearns had to liquidate two sizable portfolios because the leverage factor was eight to one. Once the value of the paper fell more than 12.5%, it was over: the funds lost the minimal equity-base and actually went negative in value. There was no choice, they had to be sold, thus exacerbating the selling pressure, not to mention the selling volume. All in all a negative perfect storm.

But this article is about Bank of America.

Bank of America is a major mortgage player in the United States. Yes, it has had to raise the provisions for bad debts -- $1.81 billion this past second quarter, up from $1.24 billion in the first quarter. But, BAC DOES NOT need to package its mortgages and re-sell them to lessen its risk profile. BAC can hold the paper in its own portfolio.

Also, no leverage, therefore, no need to sell into the depressed market place any questionable paper. BAC can actually use its massive capital base and buy other people's paper at hugely discounted prices. BAC has not commented or admitted as such as this is proprietary trading information. But the power to do so is in their hands.

Bank of America is a diversified, national bank with a revenue stream that is extremely visible. Its services include a huge consumer and small-to-large businesses franchise, and a loan portfolio, other than mortgages, that is second to none. BAC has historically raised its dividend and currently pays an annual amount of $2.56 per share, which translates to a yield of 5.30% based on its Friday closing price of $48.60. The yield is higher than the U.S. Treasury 10-year note!

It appears the Federal Reserve is going to drop the key interest rate from the 5.25% level by perhaps 50 basis points, if not more. If this occurs, money will flow to where yields are secure. The BAC dividend at a current 5.3% yield, would have to go down to remain in lock-step with the yield market, therefore the stock would go up in value. I expect BAC to earn $4.92 per share for 2007 and $5.35 per share in 2008. That's superior dividend coverage, over 2 to 1.

BAC has upside potential these next two years of 30-40% and if the dividend is included, the total return could rise to 40-50% over the two years. The Bank of America is a strategic acquirer of geographically advantageous banks. The LaSalle Bank, headquartered in Chicago, should be closed in the fourth quarter thus putting BAC in a very strong position in Illinois, Indiana and Michigan. As valuations remain depressed in the sector, BAC may acquire other strategic assets to bolster its nationwide presence.

The risk is low and the reward potential is high...

Georges Yared is the CIO of Yared Investment Research and the author of Stop Losing Money Today.

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