Bank of America Corp: Don’t Sell BAC Stock Ahead of a Bad Quarter

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Bank of America Corp (BAC) reports results Thursday, but while there’s every reason to expect them to be as bad as the rest of the sector’s, that doesn’t mean BAC stock is a sell.

Bank of America Corp: Don't Sell BAC Stock Ahead of a Bad Quarter

Nothing is going right for the nation’s banks these days, not just BAC.

Take negative interest rates in Japan and Europe, instability in the yuan, poor equity market performance and rate-hike uncertainty here at home, and no wonder there’s no appetite for things like fixed income or initial public offerings.

Oh, yes, and then there’s the matter of exposure to dodgy debt in the oil patch.

The first quarter is usually great for higher-margin activity in fixed income, mergers and acquisitions and initial public offerings. Not so this year. As CLSA analyst Mike Mayo said: “It was an ugly quarter. It almost seemed like there was nostalgia for the financial crisis.”

Trading revenue at BAC is projected to have dropped 15% in the first three months of the year. Even the boring old business of banking took a a hit. Hope for higher net interest margins soon was dashed when the Federal Reserve suggested a less aggressive course for higher interest rates.

BAC Stock Set to Post Lower Earnings and Revenue

For the most recent quarter, analysts polled by Thomson Reuters project BAC earnings to fall to 21 cents a share from 27 cents a share in last year’s first quarter. Revenue, meanwhile, is expected to decline more than 5% to $20.33 billion.

Full year earnings are pegged at $1.35 a share vs. $1.38 last year for now, but we’ll see how that holds up after the quarterly report. After all, Wall Street is keen to hear about any increase to loan-loss reserves tied to the energy sector.

As an aside, any damage should be more than manageable. Analysts at Barclays say oil and gas accounts for just 2.5% of BofA’s total loans outstanding.

Still, it was not a good quarter. But as bad of a three-month period this was for Bank of America, the important part to remember is that it’s not unexpected. Any ugly news should already be priced into the stock.

One would certainly hope so, anyway. BAC stock is off 23% so far this year vs. an S&P 500 that’s up less than 1%. Bank of America is also underperforming peers. JPMorgan Chase & Co. (JPM) is down 12% for the year-to-date, Wells Fargo & Co (WFC) is off 13% and Citigroup Inc (C) has lost more than 20%.

And yet BAC stock still looks like a good bet, at least for more patient investors. The reality is that Bank of America more than reflects the risks presented by defaults in the energy sector or perceived weakness in the U.S. economy. Indeed, BAC shares now trade at just 0.57 times their book value. Even Citigroup gets a slightly higher valuation.

Bank of America can’t do much when the rest of the sector is underwater, but it’s not like these conditions will persist forever. At the same time, BAC stock is very much tied to the domestic economy, and that’s doing pretty well.

It will take a while for BofA’s true value to emerge, but at current levels it looks like a bargain.

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/2016/04/bank-of-america-bac-stock-dont-sell/.

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