The Bank of America Corp (BAC) Stock Rally Is Nearing Its End

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Thanks in part to Donald Trump, and in part to Warren Buffett, Bank of America Corp (NYSE:BAC) has become one of America’s most beloved stocks over the last few months. BAC stock is up 9% in the past month, and likely will hit double digits with a 2% boost Wednesday morning. And since last November’s election, shares are up a whopping 45%.

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Heck, BofA now trades at a premium to the bank’s book value — something the stock hasn’t been able to boast in quite some time.

You would expect that results would have improved to justify those gains, but they have not. BAC stock is up in anticipation of rising interest rates, and thus, rising spreads between what the bank pays for money and what it can get for it.

Based on results as reported in January, this stock should be going nowhere.

For the quarter ending in December, net income was off $300 million from the previous quarter, and was barely half what was reported in July. Assets dropped. Share count rose. And the price-to-earnings ratio has simply drifted upward from close to 10 to a nearly market-matching 17.

“We” Still Love Bank of America

Our James Hargett thinks BAC common shares can rise another 15%, to $30, this year, following recent analyst upgrades and in anticipation of another rate hike from the Federal Reserve which would let it hike its prices on loans. Our Nicholas Chahine suggests buying options to capture the coming gains, taking advantage of the stock’s technical chart.

In his widely anticipated annual letter, Buffett suggests he may convert preferred stock he bought in 2011 into common stock through a warrant, which he can do by 2021, assuming the annual dividend rises to just 11 cents per share. He praised BofA’s stock buyback program, which cut the share count from 10.38 billion to 10.05 billion during 2016.

Analysts are so pleased with the stock’s performance that they’re not even noticing the 25% raise given CEO Brian Moynihan, who got his job during the last financial crisis.

The Secret Weapon Is Technology

Still, the stock’s gains, and higher management pay, have piled on pressure to expand earnings. Here, Bank of America has a secret weapon in hand: technology.

Technology has helped Bank of America make consumer banking a major profit center. The company is hoping to expand those profits with employee-less branches where customers speak with employees through video screens, requiring just one-quarter the real estate of a regular branch.

Another way forward is to compete hard against innovators like Venmo, a person-to-person payment system from Paypal Holdings Inc (NASDAQ:PYPL). Bank of America will be the first of the big banks to roll out the industry’s Venmo-killer, called Zelle. While it’s a free service, the hope is it will encourage millennials to do all their banking with Bank of America, using its vast branch network to avoid ATM fees.

The Downside

The downside of people piling into a stock is that it must then perform, or they look foolish and sell.

Analysts expect Bank of America to earn 46 cents per share during the current quarter, 15% more than in the December quarter. Failure to hit the market could hit BAC stock hard.

It may be difficult to hit the mark if loan growth stops and there are indications it has. An end to loan growth, meanwhile, could hint at a recession in the future, and that would also hit earnings, thus the bank’s valuation. Banks can live with slow growth and rising interest rates, but they can’t prosper with recessions, where loans go bad.

My own view is that the rise of this stock is nearing its end. I do anticipate a recession in the future, as we haven’t had one in eight years, asset values are stressed, inflation is rising, and international trade should decline.

I have held Bank of America stock in the past, but I don’t have any now.

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 did not hold a position in any of the aforementioned securities.

Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, available at the Amazon Kindle store. Tweet him at @danablankenhorn, connect with him on Mastodon or subscribe to his Substack.


Article printed from InvestorPlace Media, https://investorplace.com/2017/03/bank-of-america-corp-bac-stock-rally-near-end/.

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