At the moment, the concerns surrounding Bank of America Corp (NYSE:BAC) stock come down to valuation and the economy as a whole. BAC stock has risen over 150% just since July 2016, and returned 35% in 2017 alone. Meanwhile, the economy looks strong — but market jitters have introduced some volatility into BAC over the past few weeks.
There are some risks, then, when it comes to Bank of America stock. At $32, I don’t like BAC quite as much as I did at the beginning of last year, when I first recommended it. Still, there’s enough here to see more upside ahead for BofA shares. The stock has made a big run, but the valuation remains reasonable. The market has been a bit more nervous of late — but the banking sector looks poised for a strong year.
As far as that sector goes, I still like BAC stock best among the big banks, though a case can be made for JPMorgan Chase & Co. (NYSE:JPM). (Nicholas Chahine made a solid case for JPM on this site just two weeks ago.) I’m not convinced the regulatory problems at Wells Fargo & Co (NYSE:WFC) are over (or even close to being over). Citigroup Inc (NYSE:C) still has work left to do in its long-running turnaround.
Meanwhile, BAC stock has outperformed its big bank rivals over the past 1-, 3-, and 5-year periods. And I think it will do so again going forward.
Macro Concerns for Bank of America?
I wrote back in January, ahead of fourth-quarter earnings from Bank of America, that there could be some choppiness in the stock in 2018. Indeed, BAC stock saw a rather volatile February — though not for the reasons I predicted. A market spooked by increasing Treasury yields saw a number of major sell-offs, which, at times, brought BAC down back below $29.
The volatility in early February, in particular, does highlight one key potential risk for BAC stock. Rising interest rates are benefiting BofA and other big banks, creating a wider interest rate spread and helping earnings. But those rising rates potentially could hurt overall investor confidence — which could offset the benefit of those higher earnings to BAC stock. The net effect of higher rates could be zero — or negative.
It’s possible more choppy trading lies ahead for BAC. This certainly feels like a different market than it did last year (or in January). As macro-sensitive as BofA is, Bank of America stock is going to react to any macro jitters.
But longer-term, there’s still plenty of reason for optimism. BofA’s credit book continues to perform well, including in the fourth quarter. Equity markets aside, rising rates should help earnings per share. So will tax reform, both directly and, possibly, indirectly, if lower taxes lead to increased corporate activity and more revenue for BofA.
There are macro risks here. But that’s true of the sector, too and, basically, the entire market. And at the current valuation, the rewards appear to sharply outweigh the risks.
BAC Stock Remains a Buy
BAC trades at just 11 times 2019 EPS estimates. That’s a multiple that presumes either: a) the economic cycle is nearing an end and/or b) BofA’s growth will slow markedly in the not-too-distant future.
As far as the cycle goes, we are in the longest economic expansion ever and, again, macro risks are relevant here. But at the moment, Bank of America and its peers look healthy. And the post-crisis reforms of Dodd-Frank and other bills — even if they stunted growth, as some critics argue — made the entire industry a safer place.
As for growth slowing, it’s possible BofA could see some competitive pressure. I’m not quite ready to worry about Amazon.com, Inc. (NASDAQ:AMZN) and its reported checking product, but Dana Blankenhorn has argued that Bank of America is falling behind in fintech.
Blankenhorn makes an intriguing case — but upstarts have been trying to upend big banks for years, and few have seen anything but modest success. Certainly, the experience of LendingClub Corp (NYSE:LC) and On Deck Capital Inc (NYSE:ONDK) shows financial disruption is much harder than it looks. There’s a reason the big banks are big — and there are plenty of structural reasons why they will stay that way.
If that turns out to be the case, there’s room for upside in BAC stock. A dividend increase likely is coming in August, and it could be a big raise given tax reform and lower capital requirements. Even a modest 13-15 EPS multiple suggests a path for BAC to clear $40.
There are risks here, but even considering those risks, BAC stock looks undervalued. It’s perhaps not as undervalued as it was a year ago, but that doesn’t mean its run is over.
As of this writing, Vince Martin has no positions in any securities mentioned.