Bank of America Corp (BAC): Lawsuits, Bruce Berkowitz’s Secret Sauce?

How to evaluate a company’s legal battles
A lawsuit generally isn’t good for businesses, especially if investors see the potential costs and losses as reason to stay away. As many know, plenty of investors jumped ship when Bank of America Corp (NYSE:BAC)’s legal troubles ballooned, thanks to its Countrywide acquisition. But to a value investor, a mass exodus like that may present an opportunity. Based on Warren Buffett’s mantra of being greedy when others are fearful, and fearful when others are greedy, the reduced stock price created by decreased confidence in the banks’ ability to win cases is just the right time for a value investor to jump in. But only after making sure of one very important thing: that the lawsuits don’t change the fundamentals of the business.

Now, it’s no secret that B of A’s earnings have not been up to par, largely because of continued legal fees and settlements. But the majority of the suits are legacy issues, without much influence on the current business model. Because of the mess from the financial crisis, Bank of America Corp (NYSE:BAC) does not use the same type of practices that created the majority of its cases. Likewise for AIG, which has even decided to invest in whole mortgages, where it can evaluate the entire loan portfolio, instead of pools of mortgages that were sold to it by other institutions.

Berkowitz
There’s no way for me to say one way or the other if Berkowitz chooses to invest because of the lawsuits, or in spite of them. But one thing is clear — as an investor, he is willing to diverge from the crowd and walk straight toward an investment that others would shy away from. And with his analyzing skills, he’s determined that the businesses can withstand the bevvy of legal battles without losing their path toward future gains. As a Foolish investor, this might not be a bad approach to emulate.

The article Lawsuits: Bruce Berkowitz’s Secret Sauce? originally appeared on Fool.com and is written by Jessica Alling.

Fool contributor Jessica Alling has no position in any stocks mentioned, but you can contact her here. The Motley Fool recommends American International Group (NYSE:AIG). The Motley Fool owns shares of American International Group and Bank of America and has the following options: Long Jan 2014 $25 Calls on American International Group.

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