I’ve been arguing that investors should buy Bank of America (NYSE:BAC) for some time now. Yet, so far in 2018, the stock hasn’t cooperated. Bank of America stock is now up just 3.2% so far this year – below the 5.6% return of the S&P 500.
That’s somewhat of a surprising result. A number of the bullish catalysts that led Bank of America higher after the U.S. presidential election are coming to pass. Interest rates are rising, helping net interest margin and Bank of America profits.
The economy is strong. Bank of America’s expenses remain under control, and strong Q2 earnings showed solid credit quality.
But, as I wrote this month, investors largely have taken a “sell the news” approach toward Bank of America stock. That will change. And with the stock pulling back in recent sessions amid a struggling broad market and lower Treasury yields, investors can get an attractive entry point just above $30.
Another Bank of America Stock Rally Interrupted
It looked until recently like Bank of America finally had its feet back underneath it. A dip to an eight-month low in early July quickly reversed. Investors shrugged at earnings in mid-July, but as often been the case the past few earnings, the stock saw a delayed rally. BAC hit a four-month high just a few sessions ago.
But market fears once again have undercut a rally in the stock. The S&P 500 has dropped four straight sessions and so has Bank of America stock, which has lost over 4% in the process. Worries about Turkey’s currency have been the headline driver, with bank stocks also hit by lower Treasury yields.
From a long-term perspective, it’s difficult to argue that the recent news really affects BAC stock at all. Turkey is a major trading partner of several European countries; as such, its difficulties have raised fears of contagion.
But most of the impact has been felt in emerging market currencies and stocks, where Bank of America has minimal direct exposure. And as far as yields go, it’s not as if Bank of America is pricing in some sort of massive expansion; the stock now trades at just 10.5x 2019 EPS estimates.
In short, the recent (decline even though it doesn’t seem like much) seems like an overreaction.
The Bull Case for Bank of America Holds
Elsewhere, Citigroup (NYSE:C) is executing a turnaround that seemingly is taking forever. Deutsche Bank (NYSE:DB) looks like an intriguing high-risk speculative play, though it’s returned to its lows of late (in part due to a downgrade from a Bank of America analyst on Monday).
But for BofA, there’s a nice path to growth ahead. Net interest margin should increase through at least 2019. Tax rate help is coming for Bank of America itself this year and could boost corporate activity in coming years. Charge-off and default rates are low, and the economy still is solid.
There are risks here long-term. Investors need only look at 2006-2008 (or even late 2011 or early 2016) to see what macro fears can do to bank stocks. But those risks aren’t showing up at the moment and drama in Turkey doesn’t exactly qualify. Selling Bank of America stock over manageable risks, particularly with the stock at barely 10x earnings and 1.3x a rising book value, makes little sense.
Buying BAC on that sell-off, however, does make sense. This is a good business at a cheap valuation, and was at $32. Near $30, it’s even cheaper and an even better buy.
As of this writing, Vince Martin has no positions in any securities mentioned.