Bank of America Corp (NYSE:BAC) stock has taken a bit of a breather of late. A 50%-plus run after the election pushed BofA to a post-crisis high near $26. But BAC stock has dropped about 11% from those highs.
Of course, valuation concerns have hit the entire financial sector, not just Bank of America.
With BAC trading below $23, it’s hard not to see the money-center giant as a buying opportunity — especially ahead of the bank’s earnings report arriving next week.
I’m not surprised that some investors have chosen to take profits after BAC stock’s biggest run in years. But I’ve liked Bank of America stock for some time now. And from a long-term perspective, there’s still more room to run.
BAC Stock Remains Cheap
BofA hasn’t been alone in seeing recent weakness. Other financial stocks are down over the past month as well. Goldman Sachs Group Inc (NYSE:GS) stock has declined almost 9%; Citigroup Inc (NYSE:C) is down 4%-plus. But the decline in BAC stock actually has been the steepest, with BAC down 9.5% over the past month. Even Wells Fargo & Co (NYSE:WFC) — still dealing with the ramifications of its fake account scandal — has outperformed Bank of America.
The drop has left BAC rather cheap, trading at just 13 times 2017 earnings estimates. And while banking peers are trading at similarly depressed multiples, BofA looks stronger. Citigroup still hasn’t fully recovered from the financial crisis, and retains a number of questionable assets on its balance sheet. Goldman’s retail effort, Marcus, looks like an early disappointment. Wells Fargo’s reputation has taken a major hit — a potential competitive advantage for BofA.
BAC and JPMorgan Chase & Co. (NYSE:JPM) look like the two strongest banks at the moment – yet trade at similar multiples to peers. And with BofA coming off a fourth quarter with a historically low charge-off ratio, BAC stock looks like the safest play in the space among large-cap financials.
The Risks Look Manageable
Of course, BAC stock isn’t a risk-free play. No stock is.
Our own Chris Tyler made a prescient call for a bearish trade on Bank of America stock last month, and near-term trading could be choppy. Earnings seasons for financials begins with JPM’s report, and each company’s numbers will reverberate across the sector. Investors appear to have “sold the news” somewhat relative to rate hikes, and any sign of a pullback from the Fed in terms of raising rates could rattle BofA stock.
There’s near-term political risk as well. It certainly appears that the recent sell-off in financials was driven at least in part by the failure of the Trump administration’s health care bill. That’s raised fears that corporate tax reform — a significant potential boost for bank profitability — may not pass Congress.
Similarly, a weakened administration may not be able to move on the fiduciary standard, the Volcker rule, and other regulations targeted by the industry.
In the case of BofA, however, the potential regulatory impact should be somewhat limited. BofA’s Merrill Lynch unit already has adapted to the fiduciary standard. The proprietary trading business long was much smaller, and much less important, than it was for a company like Goldman Sachs or Morgan Stanley (NYSE:MS).
And again, BAC stock is trading at 13 times earnings; it’s not as if investors are pricing in some supercharged, regulatory-driven growth. At current levels, if the economic cycle has a few more years, and if BofA truly has de-risked its loan books, Bank of America stock should continue to rise. Right now, both drivers appear to be intact.
Bank of America Stock Is a Buy
All told, BofA looks too cheap after the recent pullback. The risks, both near-term and long-term, are real.
But Q1 earnings could be a catalyst, given cooperation from the equity markets and low Q4 delinquency rates. Recent economic data supports additional rate hikes this year, with BofA saying each 25 basis point increase adds 5 cents in EPS. That means earnings should strengthen as the year goes on — and Bank of America stock should follow.
With the stock pricing in basically zero growth, expectations still are modest, even with the stock still up nearly 40% from pre-election levels. I don’t know that I’d expect another 40% by year-end, but there’s certainly a good chance that BAC stock can challenge $26 again, at least.
The author has no positions in any securities mentioned, but may take a position in BAC stock this week.
