Bank of America Corp: BofA’s Bull Case Remains Strong Despite Rout (BAC)

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This will come as little solace to anyone investing in Bank of America Corp (BAC), but the relentless selling in equities is a much bigger problem for BAC stock than anything specific to BofA.

Bank of America Corp: BofA's Bull Case Remains Strong Despite Rout (BAC)True, recession would justify a resetting of BofA to a lower level. After all, it’s very much a play on the U.S. economy, which is a clear competitive advantage when growth in the rest of the developed world is lackluster at best and emerging markets look terrible.

But the case for a recession isn’t very compelling these days. As Ritholtz Wealth Management Chief Investment Officer Barry Ritholtz notes, General Motors (GM) just reported record sales and profits. What’s more, airlines are are booking record income, too, and hiring and wages are up while unemployment is down.

Those things just don’t happen when the economy is headed for a slowdown or is already in contraction mode.

Besides, oil prices are more in the hole because of oversupply rather than a recession-related lack of demand.

Another huge weight on Bank of America is the incredible rout in oil prices. The energy sector depends heavily on debt, and the possibility of defaults on all that borrowed money is making investors in stocks and bonds alike pretty nervous.

The thing is, oil and gas loans aren’t all that much of U.S. banks’ loan books. Analysts at Barclays figure that oil and gas accounts for just 2.5% of BofA’s total loans outstanding. BofA itself says the losses from a protracted slump will be manageable.

Overkill for Bank of America (BAC) Stock

On a conference call with analysts, CFO Paul Donofrio said if oil stays at $30 a barrel for the next nine months, the bank will have to eat $700 million in energy loans. That’s a nice chunk of change, but it’s nowhere near a disaster.

For one thing, Bank of America has already set aside $500 million in reserves to cover losses, so that part of any $700 million hit has already been accounted for.

Furthermore, BofA’s earnings from continuing operations came to nearly $6 billion last year. Sure, $700 million worth of write offs isn’t immaterial, but it’s hardly a disaster for the bottom line.

Recession and energy loans remain risks, to be sure, but the market is overdoing it when it comes to a wide swath of names, and you can count BAC among them. Shares have lost about 27% so far this year.

However, there’s no sense in fighting the tape on this one. Financial stocks get crushed when we’re headed toward the down side of the business cycle. Recession or not, the market figures that’s where we are.

The bull case for Bank of America remains pervasive, and long-term investors should stay frosty and ride this drawdown out. But it’s understandable if you’re not exactly hot to put new capital to work in BAC stock under these conditions.

As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.

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Article printed from InvestorPlace Media, https://investorplace.com/2016/02/bank-of-america-bofa-bac-stock/.

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