Stock Picks: BAC Up; CIT Down

Shares of Bank of America (BAC) got a healthy boost after bank analyst, Meredith Whitney, upgraded Goldman Sachs (GS) to Buy and expressed optimism that the financial-services sector should report strong earnings this quarter.

In an interview with CNBC, Whitney said Bank of America was among the cheapest of the big banks and she expects it to report a strong quarter. Analysts expect Bank of America, which is slated to announce earnings Friday morning, to report a profit of 21 cents a share for the quarter compared with 72 cents a share in the year-ago quarter. While the Charlotte, N.C.-based bank has recovered from its March low of $2.53 a share, it's still down 42% from a year ago, and remains in the crosshairs of critics for its role in the financial crisis.

Investors will have to contend with a vast number of moving parts when trying to decipher the banking giant's results, however. From its buyout of ailing Merrill Lynch to its bad loan write-offs, even the keenest observers are unsure about the company's fundamentals.

"Bank of America’s quarter will be filled with one-time events that may make it impossible to discern what the company is actually earning," Rochdale Securities analyst Richard Bove said in a recent earnings preview note.

The bank faces a special assessment of $900 million from the Federal Deposit Insurance Corporation; mark-to-market hits on its fair value debt of $2 billion; another mark-to-market expense on its counter-party insurance agreements of $1.5 billion; and further costs associated with the acquisition of Merrill Lynch, Bove said in a June 29 note.

Atlantic Equities analyst Richard Staite says today's share run-up is mostly due to bargain hunters looking to take advantage of the company's cheap shares. "[Bank of America] is still regarded as the beat-up stock in the sector, and when there's a bit more confidence in the sector, people are keen to buy the more beaten-up stocks," he says. "It's clearly one of the cheapest banks in the sector on any number of measures."

While Bank of America's consumer and retail banking results are expected to come in weak, the contributions from Merrill Lynch could prove to be surprisingly strong, he says.

"That's quite important for sentiment because it will show that the Merrill acquisition wasn't a total disaster," he says.

Bottom Line: Hold
Stocks of big banks have been pummeled throughout this crisis. While Bank of America's stock may seem cheap, it's still too risky to make an investment decision based on fundamentals.

Shares of commercial lender CIT Group (CIT) fell 22% in midday trading Monday amid growing concerns about its ongoing liquidity and the likelihood that it will get more government help.

Of utmost concern is that the New York lender, which provides financing to many small businesses, may not get approved for the FDIC’s Temporary Liquidity Guarantee Program (TLGP), which would allow the company to issue debt that's guaranteed by the government. Investors feared that such a rejection could hasten a path to bankruptcy. The company received about $2.3 billion from the government's Troubled Asset Relief Program.

On Sunday, CIT Group issued a statement saying "it remains in active discussions with its principal regulators on a series of measures to improve the company’s near-term liquidity position." It applied to TGLP in January and said it is looking at other financing options beyond the government.

While the possible financial collapse of CIT wouldn't exactly tumble world markets, it would have a vast impact on its roughly one million small-business customers who may not be able to land financing at other lenders.

BMO Capital Markets analyst David Chiaverini wrote Monday that being in the spotlight may worsen CIT's problems.

"With so much newfound attention centered around CIT’s liquidity, we believe a near-term panic may arise that may lead CIT’s borrowers to draw down on their $5.3 billion of unfunded financing commitments. This would exacerbate the strain on CIT’s already precarious liquidity position," he wrote.

Adam Steer, an analyst at the New York capital structure research firm CreditSights, wrote Sunday that last week's debt downgrade by Fitch Ratings to BB- from BB+ and reports that it was hiring law firm Skadden, Arps, Slate Meagher & Flom to prepare for a possible bankruptcy added to the negativity surrounding CIT.

"While we believe that CIT was possibly trying to cruise into its earnings date on July 23, with little further discussion on its possible outcome until then, the company may be gripped with weighing an imminent bankruptcy filing as investor and rating agency patience seems to have worn too thin," he wrote.

Wall Street analysts on average forecast that the company will report a second-quarter loss of $1.11 a share and a full-year loss of $4.05 a share.

Bottom Line: Sell
Bankruptcy fears won't lift anytime soon. Any positive news may help give the stock a brief bump higher, which would provide a great time for investors to jump ship.