Oops! They did it again; the “Big Four” bank stocks had a fairly large move mid-week following a lull in their post-election rally. Heavy-hitters JPMorgan Chase & Co (NYSE:JPM), Citigroup Inc (NYSE:C), and Wells Fargo & Co (NYSE:WFC) gained an average of nearly 2%. All eyes, however, were focused on Bank of America Corp. (NYSE:BAC), which more than doubled its nearest competitor with a 4% jump. Is this the final confirmation of an impending bull market in bank stocks, and BAC stock in particular?
All signs point to “yes.”
First and foremost, we can’t lose sight of the obvious. Donald Trump’s victory and subsequent four-year White House reservation stunned most everyone, especially the experts. Entire industries, such as election forecasting, took a bruising as a vast majority got their predictions wrong. It also meant that Wall Street power brokers had to do serious backstroking as they reassessed everything for which they planned.
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So … what makes BofA so special?
BAC Stock Sets Itself Apart
As a member of the elite financial club, the variance among the individual components should be small. Some might go so far as to say that bank stocks are bank stocks. They all lend money to people, and as interest rates are assumed to head higher, the fundamental sentiment for the entire sector is naturally bullish.
They’d be wrong, of course. Different banks have different amounts of resources poured into different aspects of the business, from consumer lending to trading.
Ironically, what may be driving BAC stock today is their “bad boy” reputation from yesterday. When the dust settled from the 2008 global financial crisis, Bank of America had issued $640 billion in mortgage-backed securities, according to The New York Times. That ugly number was compounded by other accusations, including wrongfully foreclosing on military service members’ homes, and racial discrimination.
Typically, any one of these accusations — if even half-true — would cripple a company. Definitely, BAC stock gave shareholders who didn’t dump out in time a hellish ride in the markets. But Americans tend to be a forgiving bunch. After a series of lawsuits addressing the ugly incidents in which Bank of America was involved, there is noticeably less furor towards the institution.
It also helps that BofA can now pull out the Wells Fargo card.
Essentially, all of the ignominy that BAC stock buyers endured is in the past. What WFC did is not only in the present, but they also dubiously took a road through which no one has ever traveled before. It’s one thing to lie to your customers — it’s quite another to create fake customers at the expense of real ones.
The Leaner, Meaner Bank of America
I would argue that Bank of America, after being handed a fresh start, is in prime position to soak up all the tailwinds in the industry at a greater rate than its competitors. With the final Federal Open Market Committee meeting of 2016 coming up in less than two weeks time, most bank stocks experienced a sizable lift. After all, higher interest rates means higher profitability for lenders.
But BofA in particular has waited patiently for a moment such as this. While its competitors were fervently cutting costs, Bank of America took the added step of closing several physical locations in favor of digital channels. That’s a genius move, considering that the millennial generation is quite tech-savvy, and prefer the convenience of online business.
As President-elect Donald Trump gets ready to assume power, many are also anticipating the relaxing of regulations such as Dodd-Frank. That gives leeway for Bank of America to do a number of investor-friendly actions — namely, raising dividends and share buybacks. Since Republicans will control Congress, there’s not too many options for the political left.
BofA Will Enjoy the Fruits of Its Labor
On a fundamental note, despite its recent slingshot move, BAC stock is still priced below book value. In and of itself, that statistic can be misleading; for instance, you typically won’t measure tech stocks by their book value.
However, it’s a fine metric for banks. And much of the competition for Bank of America stock is priced higher than their book value. Essentially, when it comes down to making a wager on bank stocks, investors will likely go with the better value. In consideration of all factors, BofA simply looks more attractive.
Assuming that we’re entering a period of normalcy after such a wildly unpredictable ride, Bank of America probably caught the wave of a lifetime. Yes, other banks will enjoy the cycle of good fortune.
But BofA took responsibility for their past sins, and in response, made smart business decisions. Because of that, BAC stock should be a sector outperformer for years to come.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
