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This Plan Makes Bank of America Corp (BAC) Stock a Long-Term Winner

Since the election, everyone loves Bank of America Corp (NYSE:BAC). Bank of America stock is up by more than a third, a rally that has taken its price-to-earnings multiple to 16.4 and its price-to-book ratio to 0.9, its highest level since before the 2008 market crash.

This Plan Makes Bank of America Corp (BAC) Stock a Long-Term Winner

The much-delayed rally is spurred by big expectations for fourth-quarter earnings, which should be boosted by trading after Trump’s upset win.

It helps that the cops are backing away from BofA’s past scandals and that it has delivered most of the relief that was ordered in older cases. It also helps that the halo was knocked off Wells Fargo & Co (NYSE:WFC), meaning it is no longer an inferior choice in the big bank market.

But investors looking for longer-term gains right now should focus on what BAC is doing for the longer-term, trying to become a tech stock.

BofA Replacing Paper, Creating Money

For most of this decade, credit card processing has been how banks made money through technology. BAC is one of the largest issuers of consumer credit cards and should benefit from the 2015 “liability shift,” under which the cost of fraud on chip cards can transfer to merchants’ banks.

But credit card processing should already be in Bank of America stock. What is not in current results are things like the end of paper checks, and savings from lower costs from moving paper and coins around the network. CEO Brian Moynihan says BofA has a decade of savings to go from the transition to digital money. 

The key player for Bank of America stock today isn’t Moynihan, but chief technology and operations officer Catherine Bessant, who has overhauled her the tech department throughout the decade and now calls her people “inventors.” The bank is investing heavily in things like cardless ATMs and mobile payment technologies, trying to head off Silicon Valley rivals, or buy the best, in what is now called the “fintech” space.

The problem for the big banks like BofA is that while small rivals can invent new payment methods, the bigger banks must rebuild their freeways while keeping traffic moving. For instance, the old technology system used by its tellers went down two days before Thanksgiving giving Bessant a black eye. Fortunately, it was a one-day story for Bank of America stock.

The Fintech Boost Is Coming for BAC Stock

InvestorPlace contributor Lucas Hahn noted this past summer how fintech will give BAC stock a big boost, while the stock remained in the doldrums.

This year, BofA has tied its small business logins to Viewpost, a fintech start-up that aims to let companies see their cash flow on a single screen. It is trying to patent use cases for blockchain and it has shifted its $17 billion technology budget from supporting infrastructure to innovation, moving workloads to software-defined infrastructure. It had 64 separate data centers in 2008. By 2019 it will have just eight.

Technology has already let BAC cut 1,200 branches and 8,400 jobs, meaning the raises it is giving its lower-paid staff are not going to be material to BAC stock owners.

Bottom Line on Bank of America Stock

The bank’s fintech strategy is long-term, focused on plowing $3 billion in savings off its $15 billion operations budget into start-ups, rather than building an “innovation lab” that might be slowed down by the bank’s internal bureaucracy.

This means that rather than chasing BofA stock for a trade, you can go for it as an investment. With fewer cops around, fewer line employees and more money coming in through the cloud rather than over the counter, BAC stock might just be starting to hit its stride. A price-to-book ratio of 1.4, near where Wells Fargo was trading before its recent troubles, would still give you a 50% gain in Bank of America stock.

Clearly, BAC stock is not just a trade.

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, did not hold a position in any of the aforementioned securities.

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Article printed from InvestorPlace Media, https://investorplace.com/2016/12/bank-of-america-corp-bac-stock-plan-long-term-winner/.

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