The ongoing sector rotation we’ve seen over the past couple of weeks, where investors are locking in profits in high-flying tech stocks, must end soon. And no other sector seems more attractive than financials, which includes Bank of America Corp (NYSE:BAC). BAC stock possesses several appealing qualities, given the bank’s ability to drastically cut costs while at the same time growing revenues, and should be on investors’ buy list.
Bank of America looks particularly well-positioned compared to the likes of Wells Fargo & Co (NYSE:WFC) and others. And confidence in BofA was boosted at the end of last week with the Federal Reserve’s recent round of stress test results.
Bank of America posted an 8.9% projected minimum common equity tier 1 capital ratio in the first part of the two-part tests; the Fed requires at least a 4.5% ratio. The second, more important, test comes Wednesday, when the Federal Reserve will approve or deny any plans to return capital to shareholders.
Thanks to actions by CEO Bryan Moynihan, including BofA’s plans to continue cutting costs even after reaching its $53 billion of expense-savings target by 2018, BAC is no longer in “recovery mode.” Now, the Charlotte-based bank is now focused on growth.
In fact, at the Morgan Stanley Financials Conference on June 14, COO Thomas Montag, said one of the bank’s main focus was to look for innovative and new ways in which technology can replace humans, so as to reduce expenses.
That mindset — combined with the fact that Wall Street analysts are forecasting a 12% year-over-year EPS increase for the banking sector (as a whole for the second quarter) — makes now the time to buy BAC stock. The bank currently trades around $23, but has a great chance of reaching $28 per share by year’s end.
That’s a roughly 20% return.
Potential Catalysts for Bank of America
The annual Comprehensive Capital Analysis and Review, or CCAR, is the time when Janet Yellen and company conduct a full-body cavity check of banks and decide whether certain banks meet conditions to warrant green-lighting their plans plans to increase stock buybacks and/or dividends. At its core, the annual stress tests ensures that banks are sufficiently capitalized to conduct their business of lending and have adequate reserves to to absorb losses in serious recession periods.
In other words, CCAR is in place to make sure that taxpayers won’t be on the hook to bail out banks for risky behavior.
Banks that pass the CCAR have seen their stocks typically rise anywhere between 2% to 5% as investors celebrate the vote of confidence, as well as announced buybacks and dividends. After Bank of America passed with flying colors in 2016, it hiked the quarterly dividend on BAC stock by 50% and announced a $5 billion stock buyback program.
From that point, BofA — which traded around $13 at the time — surged more than 70% over the next six months, peaking above $23 in December. Obviously, all financials closed out the year strongly, thanks the shocking victory by Donald Trump in the November presidential elections. Still, BAC was sitting on nearly 30% gains by the end of October, when it seemed likely that Hillary Clinton would be elected.
Bank of America currently pays out 7.5 cents per share for a 1.3% yield — not quite near the 2.3% yield of JPMorgan Chase & Co. (NYSE:JPM) or the 2.9% of Wells Fargo. Still, I could see BofA pushing its forward yield closer to 2%, thus more in line with the S&P 500.
And with $521 billion in cash on the balance sheet, versus just $488 billion debt, BAC has enough firepower to raise the buyback 40% to $7 billion in the next four quarters.
That would be something to celebrate.
Bottom Line for BAC Stock
BofA’s shares have risen just 4% year-to-date, and in fact are down about 10% from their early March highs.
But with the stock priced at a forward P/E of just 10.8, compared to P/E of 18 for the S&P 500 index, there’s still tons of value in BAC stock — something billionaire investor Warren Buffett, CEO of Berkshire Hathaway Inc. (NYSE:BRK.B), seems to agree with.
If we apply even a conservative multiple of 13 to Bank of America shares, that projects out to $28 per share over the next 12 to 18 months. Expect BofA to make more strides toward that number after part two of the stress tests on Wednesday.
As of this writing, Richard Saintvilus did not hold a position in any of the aforementioned securities.
