Bank of America Corp (BAC) Stock Is a Buffett-Stamped Buy

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Admittedly, 2017 has been a bit frustrating for Bank of America Corp (NYSE:BAC). Shares stock strongly after the election, with BofA outpacing rivals like Citigroup Inc (NYSE:C) and JPMorgan Chase & Co. (NYSE:JPM). The rally has stalled out, however: BAC stock is actually down over the past six months, and sits nearly 8% off a 52-week high.

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But investors should remain patient.

There remain plenty of reasons for potential upside, and BofA’s valuation doesn’t look particularly aggressive. Citigroup, in particular, has become more of a darling among investors over the past few months.

But BAC stock still looks like the best play in U.S. large-cap banking.

Warren Buffett’s Large Stake in BofA

The big news of late relative to Bank of America is that Warren Buffett, head of Berkshire Hathaway Inc. (NYSE:BRK.A, NYSE:BRK.B), is now the largest shareholder in BofA. Buffett exercised warrants issued during the depths of the financial crisis, when the very survival of the bank seemed potentially in doubt.

Bank of America now joins a large stake in Wells Fargo & Co (NYSE:WFC) in the Berkshire portfolio.

Fundamentally, Buffett’s conversion doesn’t materially change the bull case for BAC stock. Berkshire’s warrants, with a strike price of $7.14, were already in the money and reflected in diluted shares outstanding calculations. BofA will receive about $5 billion in cash from the exercise, which could be used to strengthen the dividend. But against a market cap of $232 billion, that cash isn’t necessarily changing valuation metrics all that much.

But Buffett did tell the Wall Street Journal that he intended to be a long-term shareholder in Bank of America. That alone is a nice vote of confidence.

And it’s not hard to see why Buffett wants to keep his position.

BAC Stock Still Looks Cheap

Bank of America looks like a classic Buffett stock. It has an incredibly valuable franchise, and one of the best brands in consumer banking. That’s particularly true given the ever-widening scandal at Wells Fargo.

Bank of America stock is cheap, trading at under 11x 2018 EPS estimates and below its book value of $24.54. BAC hasn’t traded above book consistently since before the financial crisis. But with charge-off ratios coming down, a solid economy and a significant reduction in risk, there’s a good argument that it should.

In the meantime, there’s a 2% dividend in an environment where 10-year Treasuries are yielding about the same. And it’s not as if this is some no-growth bank; net income increased nearly 25% year-over-year in the first half.

It still looks like investors don’t quite trust the story behind BAC stock. But that may change.

Bank of America’s Catalysts

Optimism toward interest rate hikes — which likely would benefit BofA more than most of its rivals — has faded a bit this year, perhaps one reason for the slowdown in BAC stock. But those hikes are on the way at some point, and could add 10 cents per share or more to BofA’s earnings.

The real estate market is solid, but not exactly roaring, with housing starts numbers recently somewhat disappointing. Optimism toward deregulation from the Trump administration has faded as well.

The obvious issue with BAC stock over the past six months is that a number of the would-be catalysts for the stock simply haven’t materialized yet. But the key word there is “yet.” Macro conditions seem supportive, and Bank of America’s credit metrics continue to improve. Interest rate hikes will come at some point. Regulatory pressure already is increasing, with crisis-era settlements related to BofA Merrill Lynch finally in the rear-view mirror.

The potential tailwinds behind Bank of America that drove post-election gains have been delayed. But they’re likely still on the horizon, in some form. That in turn suggests further growth in earnings, likely past $2 per share, and book value gains toward the high $20s over the next few years.

That combination probably is enough to get BAC stock to $30, or at least close, over the next 18 to 24 months. And while that might not be the sexiest bull case in the market, it still implies double-digit annual returns from a stock that appears to have de-risked dramatically over the past few years.

That would be a solid performance, to say the least. It’s likely why Warren Buffett is staying long BAC stock. And it’s why investors should join him.

As of this writing, Vince Martin did not hold a position in any of the aforementioned securities, but may take a long position in BAC stock in the near future.

After spending time at a retail brokerage, Vince Martin has covered the financial industry for close to a decade for InvestorPlace.com and other outlets.


Article printed from InvestorPlace Media, https://investorplace.com/2017/09/bank-of-america-corp-bac-stock-buffett-buy/.

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