I was among the investors caught out by the sudden flight of Bank of America Corp (NYSE:BAC) during November.
I had nibbled on the stock for years, always putting it back on the shelf after it disappointed yet again. Even today, it’s worth less than half what it was before the 2008 market crash.
But a combination of events this month caused many investors to take a second look at the stock, and it is not too late for your money to join the party and see a profit. The shares are up over 20% in November alone, even with a recent pullback.
Banking, selling money for more than it costs you, is a good business to be in, if you do it right. The problem is that Bank of America did not do it right. The problems of the last decade are all reflected in the companies it purchased during the crisis — Countrywide Financial and Merrill Lynch — and the hangover took many years to clear.
The hangover is over. Time to party again?
Fintech the New Buzzword
Financial technology or “fintech” is the new banking buzzword du jour. Banks are suddenly backing technology incubators and Bank of America alone reportedly has $3 billion to burn on it.
Banks have huge distribution networks, and their blessing of a mobile wallet or new payment technology can have an outsized impact.
If technology can accelerate trading volumes without raising costs, it can drive earnings forward. But many types of fintech, like blockchain, aim to replace banks and their regulators entirely, creating new crypto-currencies that are not subject to government manipulation.
There is also the question of whether technology can move the needle on bank results. Bank of America has about $2.2 trillion in assets, and generates nearly $5 billion in net income each quarter. Financial technology companies are talking about millions and billions, not billions and trillions.
Value for Money and Reputation
Investors have lately woken up to the realization that the success of Wells Fargo & Co (NYSE:WFC) was something of a mirage as its operations continue to unravel. That money needs a place to go, and Bank of America is now looking like a value choice.
Despite its recent run-up, the bank’s price-to-book ratio, the value of its assets’ book value against the business’ value, is still just .84. Technically the bank is still worth more dead than alive, while the price-to-book value of JPMorgan Chase & Co. (NYSE:JPM) is now decisively above that at 1.23.
This means people may still be seriously undervaluing Bank of America, and its franchises. An expected December rate hike should hike profit margins. Bank of America still has over 4,500 branches and 15% of the automated tellers in the U.S. are branded to it.
Merrill Lynch is also becoming more of an asset than a drag for Bank of America. Investment banking, as opposed to commercial banking and mortgage banking, is suddenly seen as a good business again, with more deals and a growing shift in assets, a result of rising interest rates.
The Bottom Line for BAC Stock
In the short run, Bank of America may be overbought and our Tyler Craig is recommending an options-based strategy for those looking to buy now.
But a fundamental investor, with a multiyear time horizon, has this to consider. Rising interest rates are good for banks. Rising trade volumes, based on instability, are good for companies like Merrill Lynch. A good reputation means something, and the reputation value from Wells Fargo is going to go somewhere.
Bank of America may soon be worth more alive than dead. Most analysts who follow Bank of America have it on their buy lists and they are not always wrong.
Dana Blankenhorn is a financial and technology journalist. His latest novel is Bridget O’Flynn vs. Something Big & Ugly. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing, he did not hold a position in any of the aforementioned securities.
