Bank of America (NYSE:BAC) has been a big winner under Donald Trump. Since shortly before the 2016 election, the stock has shot up 86%, while the Nasdaq is up just 36%.
Some of the gain was in anticipation of more bank-friendly policies and some was due to those policies having been delivered. Since the Donald Trump tax cut came into effect, the bank has booked over $13.7 billion in net income. It had just $16.6 billion of net income for all of 2017.
Analysts say Bank of America is growing in all the right ways, avoiding the scandals that took down Wells Fargo (NYSE:WFC), bringing its price to book over 1.2, after it spent the entire Barack Obama Administration under 1. That means investors see real value in its business, not just assets.
But can the run continue? Here is what to look for.
Buy Bank of America on Interest Rates
Banks become more valuable as interest rates rise. It means they can generate a bigger spread between what they buy money for and what they sell it for.
Inflation has been rising, and the Federal Reserve has been raising short-term interest rates. This should be bullish for all the big banks, especially Bank of America, which has a large consumer finance unit, credit cards on which it can hike rates quickly. The bank’s net interest margin is hovering between 2% and 2.5%.
Buy BAC Stock on Uncertainty
Bank of America has developed a fortress balance sheet the last few years, with nearly $2.3 trillion in assets, and net tangible assets of over $175 billion. The bank passed the Federal Reserve’s “stress test” this year, meaning it can handle a sudden downturn in business.
Compare that certainty to the uncertainty taking over Europe and emerging markets, and the falling value of currencies like the Turkish lira and Chinese yuan. Bank of America looks safe.
Buy Bank of America on Moynihan
Brian Moynihan has been CEO of the bank since 2010. He has pushed the envelope on pricing and taxes but has avoided the kind of trouble that dogged his predecessors.
Moynihan’s strategy of closing branches and increasing the use of electronic banking services seems to fit the times. The bank took in more deposits through smartphones than branches for the first time in the second quarter.
Sell BAC Stock on the Yield Curve
The yield curve, a graph showing the interest rates charged for loans of various durations, is flashing danger signs.
The Treasury delivers daily data on loan rates, and the difference between it borrowing money for three months and borrowing it for 30 years is now below 1%. This was 1.1% just at the start of the month.
When the yield curve inverts, recessions often follow.
Sell Bank of America on Trump
Bank of America has hitched its wagon to Trump’s economy, becoming increasingly bullish even as prices have increased. If you think the economy is running too hot, you may not want to be as deeply into it as Bank of America is.
So far, Trump policies have benefited bankers more than their customers, giving them increasing amounts of capital flowing through the system, big buybacks of stock and rising dividends. Meanwhile, incomes have remained flat — lower when adjusted for inflation.
Sell BAC Stock on Boredom
Despite its long-term rise, Bank of America is usually a boring stock. The shares are down 4% over the last six months, and the Slingshot Trader is only looking for a near-term run to $32.50, barely $1.70 higher than its Aug. 15 opening price.
The bank’s price to earnings multiple is 16, in line with the market, and the reason you buy a stock like this is dividends, which at 60 cents per share offer a yield of just 1.9%, lower than 10-year Treasury bills.
This is not a stock for plungers, but one for long-term investors.
The Bottom Line
Since we’ve mostly recovered from the financial crisis, banking has become boring again. It’s a “safe haven” from the current economic storms.
And Bank of America is among the safest of the banks. It’s a conservative investment, and I mean that in the nicest possible way.
Dana Blankenhorn is a financial and technology journalist. He is the author of a new mystery thriller, The Romantic Detective Finds Her Family, 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 story.
