Shares of Bank of America Corp (NYSE:BAC) had been trading well for the past month, even giving its prior highs a run for its money. But BAC stock failed just below its multiyear high of $25.80 set earlier this year, then quickly reversed lower.
This move hasn’t come on any BofA-specific news, but instead a tide of global insecurity that has pulled down most of the market. So let’s see if Bank of America in specific is flashing a warning sign, or a buying opportunity.
Many bank stocks — BAC included — have rallied firmly since the 2016 presidential election. While President Donald Trump’s ability to get through his aggressive agenda may be up for debate, the impact even his wishes have had on certain sectors is not. Bank stocks rose after the election amid not just the belief that Trump would strike down regulations in the financial space, but also that economic growth would expand and that the Federal Reserve would continue hiking interest rates.
Rising rates are a big win for banks and other financial-related stocks, providing an instant boost to their bottom line thanks to the interest rate spread. And as the economy improves, businesses and consumers become more active, resulting in more transactions and borrowing — again, bullish for banks.
Finally, Trump has signaled several times that he plans on striking down various financial regulations that banks say have cramped flexibility and made it more difficult to deliver profits. This is a boon for the likes of BAC stock, as well as other major banks like Citigroup Inc (NYSE:C), JPMorgan Chase & Co. (NYSE:JPM), and of course trading shops such as Goldman Sachs Group Inc (NYSE:GS).
The Fundamental Case for Bank of America
Analysts expect Bank of America’s top line to grow about 6% this year and 3.8% in 2018. While that’s not robust, earnings growth of 21.3% and 19.2% in 2017 and 2018 is. Over the course of the next five years — admittedly tough to predict — analysts expect earnings to grow 11.8% annually.
Operating margins have been rising since 2011 and have been doing so in a very consistent manner since 2015. BofA’s margins are now at the highest level since the financial crisis. However, the idea is that margins should continue expanding as the Fed increasing helps the bank to lend out at higher rates.
BAC stock is also cheap, trading at a forward price-to-earnings ratio of 11. It’s tough to find a stock that’s expected to grow earnings by 20% in the year ahead yet trades at a P/E closer to 10.
Moreover, while its price-to-book ratio has expanded to roughly 1 — BofA traded under book for a long time — I don’t view this as a negative. The substantially low P/B ratio simply has meant that if Bank of America were liquidated, its stock would be worth more than all those assets. (So, BAC may have been worth $70 billion based on its stock, despite the book value of its assets going for $100 billion.)
But many banks traded like this for years following the financial crisis, and most banks’ P/Bs have headed higher in the past few years. This isn’t a bubble — it’s a move to normalization as banks finally cease paying fines and start making money after years of digging out from under the Great Recession’s trench.
Bottom Line on BAC Stock
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Bank of America is at worst reasonably valued, and likely still undervalued, and is operating with a solid economic backdrop.
Recently, on June 9, we said to stay long BAC stock near $22.50. After a run-up north of $25, we said in July that investors should keep their targets set near prior highs. We came within a few pennies of that, but now what?
For the risk-averse, perhaps buying now seems impractical. Growing concerns over America’s saber rattling with North Korea and its accelerating nuclear program are shaking the market just as we enter the most volatile time for the year.
If you’re willing to take on a little risk, I’d buy BAC stock near current levels. Shares have been stuck in a channel between $22 and $25.50 for nine months. Clearly there is demand when it gets to the lower end of that level, so if you want to feel more confident, consider waiting for an additional dip to $22.
Will we see that level again? We might, especially if the North Korea situation froths up any more than it already has. But should that go away, expect Bank of America to perk up in a hurry.
Trend-line support near $24 may kick in and help BAC stock rally — but only if the geopolitical environment normalizes.
Keep calm and carry on with Bank of America, but also stay disciplined.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter at @BretKenwell. As of this writing, Bret Kenwell did not hold a position in any of the aforementioned securities.
