“The party’s over,” sang Judy Holliday in Bells are Ringing, a musical from 60 years ago. “They’ve burst your pretty balloon and taken the moon away.” Bank of America Corp (NYSE:BAC) stock had a party after Donald Trump’s election in November … but that party, too, now seems to be over.
The highs from March were not repeated after the company’s first quarter earnings came out in April. They seem far away in May.
In fact, earnings have been stuck in neutral for some time, coming in at 41 cents per share, then 39 cents per share and most recently 40 cents per share.
Bank of America was seen as being honest, at least more honest than Wells Fargo & Co. (NYSE:WFC). True, a former executive vice president for the bank’s wealth management division was indicted for embezzlement this week, but it seems to be a “one bad apple” case, not systemic as it was at Wells.
But honesty, while nice, doesn’t always fuel returns. With BAC stock off roughly 8% from its March highs, Bank of America clearly needs a spark.
Where Is the New Catalyst?
Most analysts still have Bank of America stock on their buy lists, but the bank now has to deliver on many implied promises. It didn’t do that during the first quarter.
Could technology be that catalyst? BofA now has 100,000 people working on its technology platforms, running ATMs, processing credit cards, and making big noises about fintech and the cloud.
But fintech is still in an experimental phase. The advantage lies mainly with small teams who use agile development techniques, quick and dirty solutions that scale only after being proven. That’s difficult for a big bank, it’s not in the corporate DNA.
If there is a new leg up in BAC stock, it is likely to come from a series of Federal Reserve interest rate hikes. Analysts are expecting a rate hike next month, and at least one more later in the year. Higher rates mean higher margins, a better price for the money banks lend. But higher inflation, and higher interest rates, can also slow economic growth.
David Tepper’s Appaloosa Management recently placed some chips on the stock. But Tepper is growing cautious, having returned 20% of his capital to investors last year.
If that’s a buy signal, it’s a weak one.
The Buffett Bet
Warren Buffett of Berkshire Hathaway Inc. (NYSE:BRK.B) has warrants to buy 700 million shares of the bank at $7.14 each, a potential $5 billion bet that is now worth three times that.
He said at the company’s recent annual meeting he’d exercise those warrants, which expire in 2021, if he had to now. But he doesn’t have to now.
Buffett’s investment now overhangs BAC stock, despite its $232 billion market cap. The company has nearly 10 billion shares outstanding — Buffett’s potential new stake would be a dilution of 7% to present shareholders. And he could move on it at any time.
What was once propping up the shares is now holding them back.
Bottom Line on BAC Stock
Our James Brumley likes Bank of America. The company’s presentation at its recent shareholder meeting showed costs are falling, bad loans are dropping, and its returns are healthy.
But this was the bank’s own sales presentation. Our Josh Enomoto is more skeptical, saying the technicals are bad.
My own view is that we’re very late in the current recovery, and that while the next leg down won’t be centered on the banking sector as it was a decade ago, the result won’t be pretty for anyone. You buy banks when you feel that a recovery has legs, and that’s not my macro-view right now.
I’m saying thanks, but no thanks. For now.
Dana Blankenhorn is a financial and technology journalist. He is the author of the political polemic Saving Trumpistan, Restoring Democracy, available now at the Amazon Kindle store. Write him at email@example.com or follow him on Twitter at @danablankenhorn. As of this writing, he did not hold a position in any of the aforementioned securities.