Bank of America Corp (NYSE:BAC) still has the wind at its back entering 2017. Inflation is returning, which means interest rates are rising, and the shine is off rival Wells Fargo & Co. (NYSE:WFC). All these factors have propelled Bank of America stock up 40% in just the last three months, and all remain in play.
In that time frame, BAC stock’s price-to-book value has risen from less than 0.7 to over 0.9, meaning it will soon be worth the stated value of its assets.
But it is still well behind its banking peers, with JP Morgan Chase & Co. (NYSE:JPM) at 1.37 and Wells at 1.56. For the first time in a decade, banks look like healthy investments and Bank of America stock still has ground to make up.
Analysts are also continuing to pound the table for BAC stock, with 19 of 34 still having it on their buy lists despite the run-up. The most recent bullish call comes from Barclay’s, which sees another 15% upside.
But is it too late to get in on Bank of America stock?
BAC Stock’s Catalysts
Mortgages were the big catalyst for WFC when it was a hot stock. For BofA there are a more reasons for optimism.
Interest rates should continue to rise, which means the margins the bank gets on its loans should also rise. Costs are declining thanks to technology, with 400 branches having been closed just in the last two years. The regulations of the last decade look likely to disappear over the next few years, which will reduce costs further.
Don’t forget, too, that BAC includes Merrill Lynch, which means a range of investment banking income from mergers to global finance come its way as a matter of course. BofA is now focused on increasing revenue rather than trimming costs, meaning more gains from investment banking should be on the way.
Bank of America stock now stands out as among Warren Buffett’s great investments. The $5 billion he invested in the bank in 2011, when it was on its knees, is now worth over $17.4 billion. The returns are bigger than those you might enjoy, as he got preferred stock and low-cost options for his money, but the investment helped fuel recent gains by stabilizing the bank’s finances.
What Could Go Wrong for BofA?
Whenever a stock runs up quickly it’s wise to look at the bearish case.
Bank of America stock is doing the same kind of “cross-selling” that got Wells in trouble, and with Merrill Lynch, it has more products to cross-sell to larger clients.
BofA now has a 15% share in the market for underwriting municipal bonds, and the local politics implied in that business, plus the move toward selecting underwriters without an auction, could prove scandalous if conditions change.
These cautions, however, are relatively minor — a search for the 1% empty in a glass that is 99% full. For the most part, the BAC stock’s outlook is for sunny skies and solid business.
Bottom Line on Bank of America Stock
The bank is due to report earnings again on Jan. 13, before the market opens, with analysts expecting 39 cents per share in earnings on $20.76 billion in revenue. The estimate is for $1.65 billion in earnings for 2017, which gives a forward price-to-earnings multiple of 13.6. That’s still a bargain in a market where the average stock in the S&P 500 is trading at nearly twice that.
That is the primary danger. The present bull market has gone on for almost 8 years now. Before 1990, the current level would be considered speculative, a sign of possible trouble. Trouble ahead, trouble behind, and you know that notion should cross an investor’s mind.
Dana Blankenhorn is a financial and technology journalist. He is the author of the sci-fi novella Into the Cloud, available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this article.
