Bank of America Corp (BAC) Stock Is a Sneaky Good Buy for This Reason

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Shares in Bank of America Corp (NYSE:BAC) continued to drift higher since it posted better-than-expected third-quarter results, which puts BAC stock on course to break even for the year.

Bank of America Corp (BAC) Stock Is a Sneaky Good Buy for This Reason

It will be a heck of a resilient performance if BAC can end the year with gains. Shares were down nearly 30% around the time the market suffered a late-June selloff. With BAC showing progress in everything from trading to loans to cost cuts, sentiment is finally at its back.

Take a look at BAC’s price-to-book ratio, which has been climbing for more than three months. It’s up to 0.68 from a midsummer low of 0.55. True, a PB below one on a bank stock indicates investors have questions about the bank’s risk profile. But at least the trend suggests that BofA is starting to get the benefit of the market’s doubt.

A greater sense of optimism can be seen in BAC stock’s relative performance since the June tumble. Shares are up 35% since then. That smokes the money-center bank competition: JPMorgan Chase & Co. (NYSE:JPM) gained just 6% over the same span. Citigroup Inc (NYSE:C) is up 28%. Naturally Wells Fargo & Co (NYSE:WFC) is negative.

At last it’s starting to dawn on the market that there is value to be had in Bank of America stock. The firm is making strong progress on the top and bottom lines and has more cost cuts to go. At the same time, shares look cheap. The bank’s price-to-book made sense in wake of the financial crisis, but BofA is well past that now.

Plenty of Risk for BAC Stock

Every investment comes with risk and Bank of America has plenty. On the big stage, the firm is highly levered to the health of the domestic economy. For the most part that’s been a source of good news. Although, low oil prices give BAC trouble with its loans to the energy industry, the total exposure is quite low. More importantly, unemployment is low, while hiring and wages are up. Consumer confidence and the housing market are generally positive too.

Other risks, as pointed out by analysts at Keefe, Bruyette & Woods, include the depth of the management bench and future federal stress tests. But of course a prolonged period of low interest rates is the biggest knock against banks. Remember that even if the Federal Reserve’s lifts rates as expected in December, that only applies to the short part of the yield curve.

Beyond that, the market remains in control. As long as low inflation expectations and a generalized fear of risk persist, you can bet that rates will remain under pressure.

Lastly, there’s been some hand-wringing over the Department of Labor’s contentious fiduciary rule. BAC said it will minimally impact revenue, with the caveat that it was still “too soon to tell.” Just keep in mind that, KBW notes, the Department of Labor rule would impact less than 10% of the bank’s $2 trillion of client assets.

It could take a long time before the market starts valuing BAC more on the future than its past. That doesn’t mean the value isn’t there.

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/2016/10/bank-america-bac-stock-ipmedia/.

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