Top Pick Bank of America (BAC) Stock: Still A Lemon!

Some of Wall Street’s leading analysts are touting Bank of America Corp (NYSE:BAC) as a top pick among big bank stocks — thanks to upcoming earnings — and with many of its problems behind it, maybe BAC stock really is, at long last, set for a turnaround.

bank of america shpg stock c stock bac stock market todayBut why bet on it?

After all, a bullish call on BAC stock because it will likely be the best of the breed in a lackluster second-quarter earnings season isn’t much of a recommendation.

Big bank stocks have underperformed the broader market for the year-to-date, as well as over the last year. True, BAC stock is off more than 13% so far in 2015, and that makes it look set for some outperformance. It’s also set to be the biggest contributor to financial sector earnings growth in the first quarter.

However, first-quarter earnings are forecast to decline by a wide margin — the biggest drop since Q3 2009. If BAC can’t sway sentiment on quarterly earnings, why should it stand out when the wider market is under pressure in a weak earnings season?  The Street doesn’t expect all that much from big banks as it is, taking the shine off BAC stock as the star of the group.

Besides, it’s no secret BofA is going to be a sector leader when it comes to first-quarter earnings, and yet BAC stock hasn’t gotten any benefit from the news. What happened to “buy the rumor”?

BAC Depends on Sentiment

Goldman Sachs and Deutsche Bank rightly point out that BAC’s improved fundamentals have been obscured by the relentless run of legal costs. Earlier this month, Goldman Sachs upgraded BAC stock to Buy from Neutral, citing its relatively stable trading revenues and lower earnings volatility.

Deutsche Bank likewise calls BAC stock a top pick for big bank stocks, while pointing to some macro tailwinds as well. From a research note:

“BAC remains the best large bank play on a stronger US economy/higher rates and has good leverage to rising capital markets revenue (including [fixed income, currencies and commodities]). BAC has also made good progress reducing legacy mortgage costs (with more to come) and core expenses.”

But, again, rising rates — sometimes this summer — are widely expected by the markets, and they’ve done nothing for BAC stock so far. Cost cuts are another well-known story for BAC.

Perhaps most damning, BAC stock got no lift from Goldman Sachs and Deutsche Bank tapping it as a top pick. Indeed, it actually declined the day the news came out. The market sold off sharply on March 31 and took BAC with it.

As BofA Chief Executive Brian Moynihan said in a recent interview that the BAC stock price “depends on market sentiment,” and there’s still no evidence that sentiment has changed.

Maybe BAC can change some minds with first-quarter earnings, but be forewarned that this is likely to be the worst earnings period in years. Even if BAC manages to be a bright spot, that could easily be dismissed amid generalized weakness.

On a long enough time frame, BAC is probably a good value at current levels. But with sentiment still somewhat sour on this name, buying BAC in anticipation of first-quarter earnings sounds like a coin flip — at best — for short-term outperformance.

As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.

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