Bank of America Corp’s (BAC) stock is at an important, if not outright critical, crossroads. The embattled financial sector continues to lead losses in the markets this year. At the same time, a majority of S&P 500 sectors are in positive territory, averaging year-to-date gains of 6%.
This makes the case for BAC stock particularly risky. So with Bank of America’s shares down by double digits since the beginning of January, the question is … will it get even worse, or can this mega-bank turn things around?
Against the overall framework, BAC faces a mountain of challenges.
Primarily, the U.S. Federal Reserve presents the most vocal headwind. Fed chairwoman Janet Yellen at one point seemed gung-ho on interest rate hikes, which would be bullish for interest-generated income. However, that’s become an unstable proposition, especially with the terrible figures from the most recent jobs report.
Moreover, quality of loans is a problem. Currently, the energy sector is borrowing the most from the big banks, which translates into a major gamble of a very speculative industry.
Historical Analysis
While Bank of America has implemented a vast number of positive changes, as a long-term investment, BAC stock simply falls short. Annual returns for BAC have steadily eroded over the past three decades, save for the rare anomaly. Between 2010 and 2015, returns averaged a little over 10%. This was in line with the benchmark exchange-traded fund Financial Select Sector SPDR Fund (XLF). However, it was short of the 12% average gains seen in the SPDR S&P 500 ETF Trust (SPY).
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Instead, BAC is acting more like a penny stock.
In the years prior to 2000, BAC stock put up on average 22% returns. But since the dawn of the current century, BAC averages less than 7%. The sharp reduction is primarily the result of horrific losses in 2008 and 2011. However, Bank of America shares are still positive long-term due to reactionary spike moves.
But it’s not just the absolute changes that have occurred on a historical basis. BAC stock has shifted from a seasonally consistent investment to one that is far more cyclical in nature. Historically, Bank of America shares are strongest in the first quarter, where they average 15% year-over-year gains. They are weakest in the second quarter (+11% YOY). But the spread between these two quarters is fairly small at 37%.
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The spread between the strongest and weakest quarters exploded to 191%. Also, Q3 switched places with Q2 to become the least profitable quarter. That would imply that we’re not done seeing the worst for BAC stock this year.
To add to the pessimism, Bank of America’s most recent performance in the historically strong Q1 was absolutely terrible.
What to Do With BAC Stock
For the immediate future, playing Bank of America will require caution and a hands-on approach. When BAC stock is positive in Q3, the gains average a little less than 25%. When shares are negative, the losses average 24%. Statistically, the risk-reward structure is almost perfectly balanced. That’s wonderful if you’re tuning a piano … but in the stock market, you obviously want the odds in your favor. If you do buy BAC this summer, you improve your odds of profitability if you sell before Q3 of next year.
Then again, it’s hard to justify the risk in Bank of America unless it’s a nearer-term trade. In that sense, the volatility of BAC stock is favorable, as it will typically move with greater intensity than rival JPMorgan Chase & Co. (JPM) or the broader XLF. Just make sure to account for the inherent choppiness.
For the “set it and forget it” crowd, BAC stock is a less constructive component of one’s personal portfolio. Bank of America is a laggard in a sea of laggards. While there are pockets of profitability, they can only be exploited through quick and decisive trading.
Any position held longer than a year has the potential of being rather frustrating, especially given the uncertainty in the financial sector.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
