Bank of America Corp (NYSE:BAC) has been a difficult stock to peg since the financial crisis. BAC stock has had its ups and downs since then — it hit a low of $3.95 at the worst of the crisis, recovered to almost $18 by March of 2010, fell again to $5.56 by the end of 2011, and then entered a trading range in the teens before finally breaking out of it in October. It now sits near $23, its highest since October of 2008.
Now, since hitting its low, it has outperformed its peers — but that’s also because it got hit much harder. BAC stock is up 276% since Feb. 1 of 2009. J.P. Morgan Chase & Co. (NYSE:JPM) is up 234%, U.S. Bancorp (NYSE:USB) is up 250% and Wells Fargo & Co. (NYSE:WFC) is up 203%.
However, if we look at a ten-year period, BAC stock is down 56% and the others are up between 44% and 65%.
What is the play with BAC stock now? Is there an argument that it is undervalued? Or is the price depressed for a reason?
Taking a Long Look at BAC Stock
For starters, remember that banks generally peg their loans to the 10-year Treasury. Now, in the third quarter, BAC told investors that net interest income rose 3% even though long-term rates were lower than the year before. That’s a good thing. The yield was also stable because of growth in loans and in deposits.
About a third of BAC deposits, or $450 billion, don’t bear interest. That means it can use this money free of charge to lend out at higher rates. Meanwhile, charge-offs declined. Net income was huge at $5 billion, and BAC crushed estimates in the process.
Another bullish signal that some investors are considering are the possibility of rising rates.
Now, as I said, if rates go up that means Bank of America can charge more for its loans as well. That’s a good thing, as it increases net interest income.
However, the glee over the possibility of rising rates seems overhyped to me. The economy is still weak. There’s a lot of enthusiasm over what President-Elect Donald Trump may do when he takes over, but the idea that the Federal Reserve will raise rates in the near term seems far-fetched to me.
That is, unless Janet Yellen — who has proven to be a political animal and not the neutral party she is supposed to be — raises rates too soon. We saw a ¼ point increase this time last year for absolutely no good reason. It was done to “prove” that the economy was doing better. Really? Then why weren’t there any other increases?
So I wouldn’t be too quick to assume rates are going anywhere.
There’s also a few downsides to consider. People seem to forget that Warren Buffett and Berkshire Hathaway Inc. (NYSE:BRK-A) own $5 billion in preferred BofA stock, paying 6% … and a warrant to purchase 700 million shares of the common before August 2021 for a mere $7.14 per share.
Warren is sitting so happy right now, on a 200% gain that he will surely execute.
Bank of America stock investors, however, will not be happy, and that may be one reason for the depressed stock price. BofA has repurchased about 550 million shares in the past few years, which means when (not if) Buffett exercises his warrants, all those share repurchases get spit right back out again. You have to figure that between now and 2021, even more repurchases will occur, which means the percentage dilution of BAC stock will be something like 7%-10%.
That in turn means dividends must be paid on all those shares, which means less chance of a dividend increase. BAC yields a paltry 1.4%. Its competitors are all above 2%.
For me, then, I think Bank of America stock is a trading stock only. I suspect you can go long, given the price breakout, but set a 7%-10% stop.
Lawrence Meyers is the CEO of PDL Capital, and manager of the forthcoming Liberty Portfolio stock newsletter. As of this writing, he has no position in any stock mentioned. He has 22 years’ experience in the stock market, and has written more than 1,600 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.
