A lot of people are pounding the table for Bank of America Corp (NYSE:BAC) right now, urging you to buy the stock. On TV, Jim Cramer says all the big banks are cheap. Here at InvestorPlace, Richard Saintvilus has a price target on BAC stock of $30, about $5 per share above its present level.
After delivering impressive earnings driven by its Merrill Lynch unit, which does global investment banking and wealth management, CEO Brian Moynihan is trying to boost the main bank’s earnings. He has cut staff at its Charlotte headquarters and in Latin America, while rolling out a new “premium rewards” credit card meant to build loyalty across its banking services.
Serge Berger says the bank is ready for a “directional release to the upside,” more likely to go up and out of its trading range than go down. Nicholas Chahine suggests options can maximize your gains.
I can’t help but wonder, though, how much bullish energy BAC stock has left.
The Bear Case
When everyone I respect is saying one thing, I tend to look at the other side more closely. There are reasons to think Bank of America is fully priced.
First, while a price-to-earnings multiple of 15 seems low in the current market — where the average stock in the Standard & Poor’s 500 trades at nearly 25 times earnings — we are now at levels which, during the 20th century, have signaled a correction ahead.
Credit card charge-offs are rising, often a sign of economic trouble, and the new rewards card isn’t nearly as generous as it appears — my Costco Wholesale Corporation (NASDAQ:COST) card, offered through Citigroup Inc (NYSE:C), is more generous.
Bank of America is not acting like a bank that thinks happy days are here again. They’re acting like a bank that wants to batten down the hatches in the face of a coming storm.
Relying on Technology
Bank of America is increasingly asking technology to do what people once did. It is introducing a mobile wallet in China, seeking to monetize its technology through patents and piloting things like iris scans to reduce mobile fraud.
Bank stocks have underperformed this year, relative to other sectors, but the underperformance is minimal and the gains that analysts like Saintvilus and those at Goldman Sachs are hoping for are modest, in the range of $3-$5 per share from current levels.
The best reason to buy Bank of America is its dividend, recently hiked from 7 cents per share. But the improved rate, 12 cents per share, leaves you with a yield of just 1.94% at current prices. That’s not good enough when the 10-year bond is at 2.25%.
The second-best reason to buy Bank of America, or any of the big banks, is in anticipation of more rate hikes by the Federal Reserve. Rates did go up a quarter-point last month, giving banks bigger margins, but the Fed is more focused on unwinding its huge balance sheet, created in the wake of the 2008 financial crisis, and that could put new pressure on banks.
Bottom Line on BAC Stock
I don’t see Bank of America falling hard from here. I just don’t see it rising far, either. It is a defensive holding, with limited capital gain upside and a dividend yield I am not interested in.
You may get that 10%-15% rise that the analysts are predicting, but if you’re looking for capital gains, I think there are better opportunities.
It may be a minority view, but I suspect BAC stock — which is up 45% just since the November election — has like Trump had its day in the sun.
Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this article.
