Despite the recent downturn in bank stocks, shares of Bank of America Corp (NYSE:BAC) still possess several appealing qualities. The bank’s ability to drastically cut costs, while at the same time growing revenues on the back of higher interest rates, should have investors excited about the prospects for BAC stock — regardless of what BofA has to report in its upcoming Q1 earnings report.
As such, the fact that Bank of America shares have dropped a little more than 10% from its recent 52-week highs magnifies the value this company still possesses. Especially at a time when the Charlotte-based bank is buying back its own stock — something billionaire investor Warren Buffett, CEO of Berkshire Hathaway Inc. (NYSE:BRK.A, NYSE:BRK.B), applauded in his February annual letter to shareholders.
Bank stocks, of course, have been under pressure. Much of the gains made by banks like Bank of America, Citigroup Inc (NYSE:C) and US Bancorp (NYSE:USB) were driven on the assumption that Donald Trump would be able to deliver on his promises of financial deregulation, corporate tax cuts and economic stimulus.
However, those “wins” have yet to reveal themselves, in large part because the administration struggled longer than expected (and ultimately lost its battle) with getting healthcare reform legislation passed.
The failure by House Republicans to repeal and replace Obamacare has raised doubt about the Trump’s ability to deregulate banks and free them from the many regulatory handcuffs that impede banking revenues. If nothing else, it pushes back the timeline.
Meanwhile, if Trump is also unable to lower corporate taxes, as promised, this would prolong the decline in lending growth that has existed since the start of 2015.
Against this backdrop of uncertainty, investors have been forced to also lock in profits in BAC stock, as well as other names such as JPMorgan Chase & Co. (NYSE:JPM) and Wells Fargo & Company (NYSE:WFC), given the huge run-up they have produced since the election.
Bottom Line for BAC Stock
In the case of Bank of America, however — which in the fourth quarter reported a 47% surge in profits — the losses underscore the degree to which CEO Brian Moynihan has moved the bank beyond its legacy issues.
BofA’s fundamentals suggests it is no longer in “recovery mode” and is now focused on growth. And with Wall Street analysts forecasting a 12% year-over-year EPS increase for the banking sector (as a whole for the first quarter), now’s the time to buy back into Bank of America.
Right now, BAC stock trades at just less than 11 times forward earnings, compared to a forward P/E of 18 for the S&P 500 Index. There’s still tons of value in these shares.
Even if we apply a multiple of 13 to Bank of America, shares should reach $28 in the next 12 to 18 months — implying 22% returns.
BofA’s first-quarter earnings report is expected to come Tuesday, April 18, ahead of the opening bell.
As of this writing, Richard Saintvilus did not hold a position in any of the aforementioned securities.
