Bank of America Corp (BAC) Stock Is a Strong Buy if You Can Stay Frosty

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Shareholders in Bank of America Corp (BAC) were disappointed by the Federal Reserve’s dovish turn last week, and BAC stock has been a lost cause in 2016, but the value proposition remains for patient investors.

Bank of America (BAC) Stock Is a Strong Buy If You Can Stay FrostyThey’re just going to have to wait longer for the inflection point in BAC stock.

Low interest rates are one of the pillars of the bear case against bank stocks. 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.

Higher-rate loans mature only to be replaced by lower-rate ones which have thinner spreads. It has been a relentless headwind for all lenders.

But the case against BAC and other money-center banks goes farther than just low rates. Add in slumping trading revenue, worries about energy-sector debt and an infirm global economy, and stocks in the bank sector have been losers for some time.

Unhappily for shareholders, BAC stock has the worst performance among the big banks. Fair enough. BAC has the most exposure to energy-sector loans.

Indeed, shares in Bank of America are down more than 17% for the year-to-date. Citigroup Inc (C) — the other weak sister — has lost 15%. But even the “best” big banks are taking a beating. Wells Fargo & Co (WFC) is off 12%, while JPMorgan Chase & Co. (JPM) is down nearly 3%.

By comparison, the broader market is up 3% on a price basis over the same period.

BAC Stock’s Value Will Reveal Itself

Value investors have no choice but to remain patient. As Warren Buffett likes to say, in the short term the market is a voting machine, but in the long term it’s a weighing machine.

In other words, it takes time for value to pay off. Stick with BAC, and it will.

True, the oil market continues to weight on shares, but those pressures are cyclical, not secular. Prices for crude are actually in an uptrend. And at some point, the market should turn away from the energy issues to focus on some of Bank of America’s strengths. Namely, the consumer banking unit — by far its biggest business — saw revenue rise 4% last quarter thanks to higher deposits and more loans.

At the same time, since Bank of America is the laggard among peers, it also has the most potential for outperformance on a rebound. The bank has a price-to-book value of just 0.59, which is the lowest value among peers. It also has the lowest return on equity.

Yet analysts expect earnings per share to increase 20% next year.

Keep in mind that BAC has met or topped Wall Street’s earnings estimates in four straight quarters. Low valuations say “cheap,” not “troubled.” Stocks are forward looking. It doesn’t square with BAC stock’s performance.

BAC stock has been outperforming WFC, JPM and WFC since the market bottom in February. That suggests there are investors out there who recognize its store of potential energy.

Lastly, results of the Federal Reserve’s annual stress test are rapidly approaching. BAC has plenty of room to raise its dividend in the coming years. If BACs get the green light to return more cash to shareholders, that’s a significant catalyst for outperformance.

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/2016/06/bank-of-america-bac-stock-buy/.

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