Nearing the halfway point of the year, Bank of America Corp (NYSE:BAC) has come to a fork in the road. BAC stock is up just 2% year-to-date and down by more than 10% over the past three months — but it has rocketed more than 50% higher over the past year. So it’s difficult to tell whether its long-term direction is higher or lower.
And at $22 per share, BofA is, in my opinion, neither cheap or expensive, making a call on valuation alone impossible.
So is BAC stock a buy, hold or sell based on the rest of its tangibles? Here’s my argument … for all three.
Buy Bank of America?
InvestorPlace writer Tom Taulli doesn’t just like BofA — he thinks the stock is ready to catch fire. Recently, Taulli gave three reasons why Bank of America’s retreating stock price provides investors with a good entry point for buying.
You take a financially sound bank, add in rising interest rates and higher margins, and make it cheap to buy, and you’ve got a nice investment opportunity in front of you.
On the first point, there’s no question that Bank of America is a big bank with the size and scale to compete with JPMorgan Chase & Co. (NYSE:JPM). That’s a good feeling to know in a very uncertain future that your bank isn’t going to disappear overnight.
What About Holding It?
Taulli’s second point about Bank of America’s net interest income in the first quarter beating its estimate by $600 million and future rate hikes leading to an expansion in margins is a good one.
In its Q1 2017 presentation materials, Bank of America makes the point that it had 7% revenue growth and 0% expense growth, giving it a 7% year over year increase in its operating leverage. Imagine what would happen with higher interest rates?
The only problem with this argument is you can say the same thing about JPM and all the other big banks. A rising tide lifts all boats. Maybe some differently than others, but enough so that it’s a wash for me. It’s neither a positive or a negative, at least not relative to its peers.
Assuming rising interest rates in the future, if you own BAC stock, I’d continue to own it.
OK, How About Selling It?
As for Taulli’s view that BAC stock is cheap, I disagree.
He rightly points out that Bank of America is trading at just 10 times fiscal 2018 earnings and 93% of book value. However, you can buy Canadian Imperial Bank of Commerce (NYSE:CM), my favorite Canadian bank, for 9.6 times fiscal 2018 earnings and a dividend yield of 4.7% — almost four times Bank of America’s return.
If you want cheap, CIBC is reasonable, especially given it recently gained shareholder approval to buy PrivateBancorp Inc (NASDAQ:PVTB), a Chicago-based bank focused on high net worth investors for $4.9 billion.
“I’m sure CIBC management is happy to have won shareholder approval given the difficulty in getting it,” said Ian Nakamoto, an equity specialist with Raymond James Ltd. “It certainly makes sense to diversify outside of Canada as they are a relatively large player in Canada.”
CIBC might not be Bank of America big, but like all Canadian banks, they usually don’t bite off more than they can chew.
To me, if you want cheap, CIBC is a much better buy than BAC.
Bottom Line on BAC Stock
Bank of America stock is not expensive. However, I don’t think it’s necessarily a value play at this stage of the game either. I think its stock is priced just right.
If you own Bank of America stock, I’d keep holding it. Of course, if you’ve held it since the middle of 2016 and you’re worried about the bull market coming to an end, I’d sell.
Those interested in buying should wait to see if it drops below $20 before jumping in.
Yes, Moynihan has done a good job tamping down expectations, but I still think you might want to wait until after it releases Q2 2017 earnings in mid-July. You might just get a better deal.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.
