Bank of America Corp (BAC) Is a Fantastic Buy for Value Investors

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Bank of America Corp (BAC) has been an attractively priced, long-term bet on the U.S. economy for some time now, and perhaps a more hawkish Federal Reserve will finally deliver the inflection point BAC needs to recoup some serious underperformance.

bacBAC is hardly alone among bank stocks being squeezed by the Fed’s ultra-low interest rate policy.

Indeed, all banks — from the regionals to the money center behemoths — are desperate for higher rates.

Net interest margin — or the difference between what the bank pays for deposits and charges on loans — has been abysmal on an industry-wide basis for years.  The spread on new loans in thin, after all.

Furthermore, higher-rate loans mature only to be replaced by lower-rate ones.

Add in slumping trading revenue, worries about energy-sector debt and an infirm global economy, and stocks in the bank sector have been a losers well beyond just this year.

What’s a particularly bitter reality is that BAC stock is the undisputed laggard among the big four of Wells Fargo & Co (WFC), JPMorgan Chase & Co. (JPM) and Citigroup Inc (C). In 2016 alone, Bank of America stock is down close to 14%. WFC, JPM and C are off 11%, 4% and 13%, respectively. Meanwhile, the sector — as measured by the KBW Bank SPDR (BKE) — has lost 6%.

All of this lags the broader market’s own poor performance.

That’s why shares across the sector popped upon release of the minutes from the Fed’s April meeting. The disappearing rate-hike cyclical just might make a June comeback.

BAC Stock as Patient Value Play

This is some of the best fundamental news BAC stock can get. Not only do rising rates make banking more profitable, it gives the market a shot of confidence.

The thinking is that the Fed wouldn’t raise interest rates if the economy were not gaining at least some momentum. And it’s exposure to U.S. economic growth that helps make the long-term value case for BAC stock.

As we’ve argued before, there are reasons for patient investors to be optimistic if they look beyond the headlines. Yes, earnings only matched Wall Street estimates in the first quarter and revenue came up short, but there was some reassuring news in between the lines.

For example, BAC cut costs at a faster pace than expected — another part of the bull case — and consumer banking showed real strength. Bank of America’s largest unit by far  saw revenue rise 4% thanks to higher deposits and more loans.

It looks like the boring old business of straight-up banking is picking up, and that speaks well of the economy and BAC’s exposure to it.

On a global basis, the U.S. economy is pretty much the only game in town these days, but it’s the long-term prospects that make the case for BAC stock at current levels. With a price-to-book value of just 0.64 — which is well below most peers — BAC is essentially priced for no growth. And yet the Street sees the bank generating strong earnings-per-share and revenue growth as soon as next year.

Bottom Line

Investors are casting a wary eye on equities and it’s said that the market can’t make progress if financial stocks are not participating, so BAC isn’t going to be topping the S&P 500 anytime soon.

But the value investor’s job is to be patient. As the most beaten-down big bank stock, Bank of America has the most potential for outsized gains when equities come back.

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/2016/05/bac-bank-of-america-stock/.

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