John Paulson was recently quoted as saying that he believed Bank Of America (BAC) would double in value by 2011. He expects BAC to earn $27.2 billion in 2011. With nine billion shares outstanding this would equal an EPSof three for BAC, at a 10X multiple that translates into a $30 stock. Meredith Whitney stated shortly afterwards that she thought banks were grossly overvalued. She stated that while it is possible that BAC will double in value eventually, she thought his timing was off. The story made a lot of waves with people arguing over who is right about the banking sector and BAC in particular.
I wrote a previous article where I questioned some of the numbers that Paulson used to get to his 2011 EPS estimate of $3 per share. I think that he i
s not taking into account the large dilution which is inevitable once BACreturns Tarp funds.
However I think the whole argument moot. As a value investor I do not think anyone can predict short term movements of the market. Short term movements in the market are dependent far more on emotion and popularity than on fundamentals. As Benjamin Graham said
In the short run, the market is a voting machine,