Bank stocks sank with the rest of the market Friday after a bad jobs report threw a June rate hike into question, but that just affords an opportunity to pick up names like Bank of America Corp (BAC) and Wells Fargo & Co (WFC) on the cheap.
Right now it looks like job creation slowed dramatically in spring. May payrolls came to just 38,000 when economists were looking for something in the neighborhood of 160,000.
At the same time, April and March combined were revised lower by 59,000. Put it all together and the economy pumped out an average of just 116,000 new jobs over the past three months vs. 219,000 over the trailing 12 months.
This is by no means good news, but do the implications for the next rate hike really make BAC and WFC combined worth $15 billion less since yesterday?
Same Old Story for BAC and WFC
It’s understandable that BofA, Wells Fargo and every other bank stock would tank on anything that delays a rate hike. Net interest margins — the difference between what a bank changes for loans and pays for deposits — are paper thin when rates are this low.
But the Federal Reserve doesn’t rely on jobs numbers alone when trying to decide rate policy. More importantly, a June hike was already highly questionable because of the U.K.’s Brexit referendum scheduled for later this month. And it’s too soon to say that July is off the table.
In other words, not much has changed. When it comes to valuing BAC stock or WFC stock, the interest rate question is the same as it was yesterday. (We single out these names because one is a bargain-basement buy, while the other trades at a premium valuation that’s justified by its superior return on equity.)
As we’ve noted before, BAC is seeing strength in its biggest business of consumer banking and has light exposure to bad debt in the energy sector. It’s making steady progress with cost cuts and its domestic focus makes the U.S. economy a long-term tailwind.
Most compelling, it’s cheap. BAC stock trades at a price-to-book value of just 0.65. That’s the lowest to be found among the money center banks.
As for Wells Fargo, it’s pretty much a tie between WFC and JPMorgan Chase & Co. (JPM) for the title of best bank stock, but in the current environment, we’ll give it the edge.
WFC is less reliant on investment banking fees and trading revenue to make its numbers. And although it has the highest P/B of the big banks, it’s also the only one to generate return on equity in excess of 10%.
The thesis hasn’t changed on the cheapest and the best of the big banks stocks in light of the dismal jobs report. If you’re dollar-cost averaging into either these names, today is a good day.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
