Bank of America Corp (BAC) Stock Is a Buy. Kinda.

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I personally see good things ahead for Bank of America Corp (NYSE:BAC). However, it’s often worth delving into not just a stock’s upsides, but the skeletons in its closet, before jumping in. And that’s what I plan to do with BAC stock today.

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My impetus? I’m considering the pros and cons of BofA as a jumping-off point to see if I might want to buy it for my new stock advisory newsletter, The Liberty Portfolio.

Why Is David Tepper So Bullish?

Sometimes it’s worth noting what respected hedge fund managers are up to, and in this case, I noticed that David Tepper recently took an interesting position in BAC stock. In Q1, Tepper dropped $200 million into Bank of America, which is notable not only for the size of the investment, but because shares are already up about 70% over the past year.

What might Tepper be thinking?

I think it may have to do with the latest stress test results, which the Federal Reserve will release at the end of June. Bank of America has been struggling to meet every last compliance test to finally put the mortgage crisis behind it, and I think this quarter, BofA may be able to accomplish this.

The reason this is important is because BAC stock has been limited in terms of paying out dividends. Bank of America pays out just 7 cents quarterly, as opposed to a 64-cent sum before the financial crisis.

If the Fed signals that all is well, BAC may not just increase the dividend, but do so rapidly and pay out a lot more. That would have the lovely double effect of driving shares higher and earning us a better yield on cost over the long run.

The latest budget proposal out of the White House does not allocate any funding to the Consumer Financial Protection Bureau. If the bureau blows up, there will be significant cost savings from regulatory removal. The CFPB and Dodd-Frank created tons of new regulations that have cost banks dearly.

In addition, if we see the promised corporate tax cut from the Trump administration, that would be yet another catalyst for BAC stock.

We are also looking at a bias towards rising interest rates, which helps bank stocks. It means greater profits from a greater spread between borrowing costs and lending revenue, and Bank of America has specifically said that a quarter-point jump in interest rates can create an extra $600 million in quarterly profits.

The Case Against BAC Stock

On the bear side, it’s entirely possible that Dodd-Frank does not blow up, that the corporate tax cut does not occur and that the BAC dividend doesn’t move an inch. The bull side of these events are, I think, somewhat priced into the stock, so there could be some decline in price if these things don’t materialize.

The economy is another thing I’m keeping my eye on.

China’s growth, if there is any, cannot be trusted because the government data simply isn’t reliable. Over here, GDP and manufacturing index numbers aren’t getting me jumping for joy. If the economy doesn’t improve, that means fewer loans get made, and Bank of America makes less in revenues.

Opportunity Cost

Yet even setting all of these bull and bear cases aside, the other question is whether your money is better invested elsewhere.

It isn’t a decision that can be made in a vacuum because you have to look at the likelihood of higher prices in the long-term for Bank of America stock versus the likelihood for other stocks, and this must still be accounted for in the context of risk.

When it comes to individual stocks, we have to ask if the risk-adjusted returns might exceed that of either some other stock or a diversified ETF. If you look at the Financial Select Sector SPDR ETF (NYSEARCA:XLF), for instance, you see a five-year mean annual return of only 1.29%. With a standard deviation of 14.11, you can find 95% certainty that the XLF will provide a return of between -27.02% and +29.51% (you add/subtract two standard deviations to mean return to find the 95% certainty). That’s a huge range!

Somehow, BofA stock actually isn’t as risky, which is saying something considering we’re comparing it to a diversified ETF.

I wouldn’t use only that as a guide, but it’s a look into the stock that you don’t often get. I’d also consider the argument that BAC sports lower valuations than many big-stock peers such as JPMorgan Chase & Co. (NYSE:JPM) and Citigroup Inc (NYSE:C).

Personally, I’d rather see a pullback in the stock first. But right this very minute, BAC stock still might be the right choice for more aggressive investors looking for financial-sector upside.

Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance. As of this writing, he had no positions in any stock mentioned. He has 22 years’ experience in the stock market, and has written more than 1,600 articles on investing. He also is the Manager of the forthcoming Liberty Portfolio. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.


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