About 10 years ago, my grandfather, a savvy investor and extremely generous man, decided to gift one stock to each of his grandchildren. I got shares of Procter & Gamble Co (NYSE:PG), which has worked out quite well, especially since he enrolled me in their dividend reinvestment program. My sister received shares of Bank of America Corp (NYSE:BAC). And holding BAC stock hasn’t worked out so well … until lately.
Now, Bank of America is making a comeback, and I expect my sister to continue to get the better of me in the years to come.
Today, I want to talk about BAC stock, including the bull case, and where I think you should buy.
Bank of America: The Comeback Trail
If you’re looking at it from 10,000 feet, the investment still doesn’t look good. A decade after peaking around $53 a share, today BAC stock trades at less than half that, at $23.
BofA, of course, was one of the biggest casualties of the subprime mortgage crisis, and BAC stock was pummeled accordingly, free falling from $50 in August 2007 to as low as $3 in February 2009.
It was no secret as to why: Earnings per share declined 28% in 2007 and another 83% in 2008, and the bank did away its once-generous dividend payout. America’s biggest banks became poster children for the financial collapse, and Bank of America was the headliner — at least on Wall Street.
Now, eight years after its 2009 nadir, BAC stock is one of the fastest-rising financials on the market. It’s up 70% in the last year, trailing only Morgan Stanley (NYSE:MS) (72% return) among big banks. And the dividend, re-instituted at a mere penny per share in September 2013, is back to respectability at 7.5 cents per share, good for a 1.3% yield. It’s not great, but it’s improving, and for now, that’s what matters.
Why Bank of America is improving isn’t a mystery. Recent operational results give a decent picture: Earnings per share were up 42% year-over-year last quarter, and have skyrocketed to $1.58 in full-year 2016 from a mere penny per share in 2011.
Sure, there have been potholes along the way. Earnings actually declined in 2014, and BAC has recorded a down quarter as recently as Q2 2016. But the general trend in Bank of America has been up, up, up … and BAC stock has followed suit.
Is it out of the woods? Hardly. Sales are still growing at a snail’s pace, improving a mere 0.86% last year. In fact, the $83.7 billion in revenues last year marked BAC’s second-worst annual top-line performance since 2012. Even in 2009, at the height of the recession, Bank of America’s sales topped $119 billion.
The bank is far from fully restored to its pre-recession financial footing.
But revenues are expected to improve to $86 billion this year, which would be the bank’s best year since 2013. Meanwhile, the bottom-line resurgence is expected to continue: analysts foresee 16% EPS growth this year, with net income reaching its highest level since 2007.
On top of it all, Bank of America is cheap. Despite a 70%, 12-month run-up, BAC stock trades at just 11 times forward earnings estimates.
Buy BAC Stock Below $24
Bank of America did suffer a steep drop earlier this month after hitting post-recession highs above $25.
The thing we haven’t mentioned here — optimism about fewer regulations under the Trump administration — has been pushing BAC and other bank stocks higher, but worries about the delay of healthcare reform has Wall Street wondering when and how changes to financial regulations will occur.
BAC stock briefly dipped below $23, and currently is trading right above the price mark. For technical analysis reasons, I’d actually prefer to wait for Bank of America shares to get back above $24 before buying in, but right now, the stock is trading for just less than book, and still remains a good value.
The long-term trend for Bank of America stock is up. A cheap valuation, improving earnings and a bank-friendly president in the White House will help fuel BAC’s momentum for months and even years to come.
I’m sure my sister is rooting for it.
As of this writing, Chris Fraley did not hold a position in any of the aforementioned securities.
