Opinions on Bank of America Corp (NYSE:BAC) are a lot like the weather. That is, if you don’t like the weather in [insert your town here], just wait five minutes because it’ll change. In the same sense, if you don’t like any given outlook for BAC stock, just wait five minutes because a different one is on the way.
Case in point: InvestorPlace’s Chris Fraley recently cautioned investors about a particularly alarming metric for BofA, while Richard Saintvilus argues that BAC stock can still reach $30 per share.
It’s potentially confusing for anyone kicking the tires, so to speak. However, some perspective on where all the different outlooks are coming from may make sense for a would-be shareholder uncertain about what to do.
Mixed Messages
Veteran investors more or less understand that a stock’s short-term direction is primarily driven by sentiment while its long-term progress is rooted in that company’s earnings growth. BAC stock isn’t immune to that reality.
Yet, in most regards, Bank of America is doubly confusing right now simply because there are so many other factors weighing on investors’ minds.
The bullish ones are clear enough. First and foremost, President Trump seems to be ready, willing and able to light a fire under the economy. Nothing drives bank profits like economic strength and borrowing. It’s not just Trump’s economic agenda that bodes well for banks, however. The President is also aiming to dial back some of the stifling regulations put in place following the subprime debt debacle.
Bank stocks, generally, have fared well since the election, evidenced by the 25% gain since Nov. 7 in iShares Dow Jones US Financial Svc. (ETF) (NYSEARCA:IYG), which focuses on the U.S. financial services industry. BAC stock is the exchange-traded fund’s second-largest holding, at 8.7% of the roster.
The backdrop of bullish-intent means nothing, however, if Donald Trump can’t get his way in full. And the fact of the matter is, banks’ core business — lending — is slowing down. The Federal Reserve’s Economic Data repository confirms that over the course of the prior two quarters, loan demand has been essentially flat on a year-over-year basis after slowing down considerably beginning in early 2015.
It’s not the direction things are “supposed to be” going, making it tough to mentally justify the 40% gain BAC stock has experienced since Trump’s election.
Still, with or without political help or even increased demand for loans, BofA is on a mission.
Bank of America is Rolling
While investors have understandably cooled their bullish jets of late, that’s not changed the fact that Bank of America has been growing its top and bottom lines, and is expected to continue doing so.
The graphic below tells the tale.
While certain aspects of its lending business have been hot and cold lately, loans aren’t BofA’s only business. Wealth-management, trading and credit cards are just some of the other things that are still working well for Bank of America, obscuring and offsetting any lending headwind. While its future revenue mix may not be crystal clear, analysts collectively expect the bank to keep growing — somehow — going forward.
At the same time, CEO Brian Moynihan is aiming to cull another few billion in expenses in the future, after lowering spending by about $2.7 billion last year to $55 billion. He’s got a target of $53 billion in mind, though hasn’t been shy about suggesting he’s aiming for even more cost-control in the foreseeable future.
And those cost cuts will be happening at the same time the bank is expected to further ramp-up the top line.
Bottom Line for BAC Stock
And there’s the distinct (though not terribly well explained) difference between the various opinions of BAC stock here. Most of the pessimistic views assume — and maybe rightfully so — that investors are going to react poorly to headlines and failure from Washington to make meaningful progress that favors banks and the economy.
Down the road though, the fact of the matter is that only a real recession could stand in the way of Bank of America. And, though turbulence may be in the cards, a legitimate economic recession isn’t on the horizon.
Point being, if you’re confused about what to make of BAC stock, take a second, closer look at the commentaries. Most of the bearish ones are short-term, and technical or news-driven in nature. The optimistic ones come from people who have taken a step back and are looking at the bigger picture. From that point of view, BofA is a buy… after a short-term dip. (You still have to respect the inevitable ebbs and flows, even if you’re getting in for the long haul.)
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @jbrumley.
