It appears Bank of America Corp (NYSE:BAC) has finally turned a critical corner. Almost ten years after the financial crisis and after writing downs billions in toxic loans, the company appears poised to function as a viable, independent business. Now BAC stock can benefit from both higher interest rates and less regulation.
Additionally, with profit growth taking its valuation to lower levels, a reasonable price and favorable tailwinds make this an opportune time to acquire Bank of America Corp stock.
BAC Stock Has Recovered and Compares Favorably to Peers
Almost ten years after the financial crisis, BAC stock has bounced back from the brink. The equity fell from over $55 per share in 2006 to just above $2.50 per share at the height of the financial crisis. The stock has bounced back and now trades at around $29 per share. Dividends have gone up every year since 2014. Also, double-digit profit growth has also returned to the company.
More recently, the equity has struggled. BAC stock has fallen about 13% from its 52-week high of $33.05 per share. Most of that drop occurred in March as fears of a trade war sent Bank of America Corp stock as well as the S&P 500 down. Despite beating analyst revenue and earnings estimates in its April 16 earnings report, the stock price saw little movement.
With the drop, BAC stock trades at a forward price-to-earnings (PE) ratio of around 11.5. While this might stand as a low PE, it compares well with peers such as Citigroup Inc (NYSE:C) and JPMorgan Chase & Co. (NYSE:JPM). Wells Fargo & Co (NYSE:WFC) also compares well on its PE ratio, despite its reputational challenges.
In a recent article, I told investors to either wait or hold out for a lower price. Both the market and BAC stock have shown more stability since then. Now, I feel this PE ratio is a bit modest given its profit potential, and interested investors should look at buying. As I also mentioned earlier, it helps that Bank of America Corp stock fits most of Benjamin Graham’s desired criteria for a value stock. In fact, Mr. Graham’s protege Warren Buffett holds a stake in BAC stock worth over $19.75 billion.
BAC Better Able to Function Like a Normal Bank
An added benefit to the recovery is that now BAC can function more like a traditional bank. What I mean by this is now the bank will operate on a market-based business model.
This traditional bank business model involves a bank offering a high enough interest rate to attract the capital it needs. It should then be able to underwrite loans at a higher interest rate and earn its profits from the difference in lending rates and deposit rates. The very low interest rates seen over the last few years were made possible only by capital provided by the Federal Reserve. With interest rates rising, it should be able to offer higher interest rates that will attract more deposits from the open market. The faster BAC can return to operating in a true market, the more confidence investors will have in BAC stock.
Other developments out of the Trump Administration point to bullish signs. The current administration looks poised to reduce the regulatory burden that hampered activity in past years. Moreover, the recent tax cut allows the bank to hold on to and loan out more of its money.
Final Thoughts on BAC stock
BAC now benefits from higher interest rates and less regulation. Given the low PE ratio on BAC stock, conditions for the stock’s price to increase have become more favorable.
The benefit of higher interest rates for BAC is twofold. Banks can pay interest rates that appeal to depositors while also providing the loan volume demanded by borrowers. Moving back towards this business model returns BAC to a business model that should inspire investor confidence. A combination of lower taxes, less regulations, and discounted valuations make BAC a great buy.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks.
