Over the past year, there has been a lot of bullishness out there with respect to Bank of America (NYSE:BAC). Specifically, according to YCharts, BAC stock has consistently maintained a consensus “Buy” rating from Wall Street analysts over the past twelve months.
During that stretch, BAC has lost more than 10%, while the S&P 500 has gained about 2%. Clearly, the bull thesis has simply been wrong.
It will continue to be wrong for the foreseeable future. The reality is that there are a plethora of fundamental risks in the financial sector at the present moment, the sum of which will challenge Bank of America’s growth prospects for the foreseeable future and keep BAC depressed.
These risks aren’t anything new. They’ve been around for a while. That’s why I’ve been pounding on the table to sell BAC over the past year (see here, here, here, and here).
These risks also aren’t going away anytime soon. That’s why I continue to pound on the table to sell BAC stock today.
The Headwinds Are Piling Up
My bear thesis on BAC stock over the past year has centered around the idea that the headwinds are piling up for this company, and they aren’t going away anytime soon.
Specifically, those headwinds are slowing global economic growth, persistently low interest rates, and an inverted yield curve. Over the past year, the U.S. and global economies have slowed. This slowdown has weighed on banking activity. As economic growth has slowed, rates have dropped substantially.
Interest rates across the yield curve are now flirting with all-time lows, and that’s not great for Bank of America’s net interest income. Further, and perhaps most catastrophic, the yield curve has inverted, meaning that Bank of America’s lending business will be handicapped for the foreseeable future.
These headwinds aren’t going away anytime soon.
Global growth should stabilize over the next several quarters. But, until the trade war gets resolved, global growth won’t improve meaningfully. Without a big rebound in growth, interest rates won’t move meaningfully higher.
Even if we do get a bounce-back in global growth and rates move somewhat higher, they won’t move much higher because technology is a secular suppressant of inflation (and high rates).
Meanwhile, the yield curve may “un-invert” if the Fed cuts rates aggressively. But, recent chatter out of the Fed doesn’t seem to imply that everyone is on board with even one more rate cut – so even if the yield curve does normalize, it likely won’t steepen to “normal” levels anytime soon.
Net net, Bank of America is still staring at a plethora of headwinds that should fundamentally challenge operations over the next several quarters.
The Valuation Is Rich
My big problem with BAC over the past year has been that, despite the glaring aforementioned headwinds, the stock has been priced richly. This remains true today.
BAC trades at over 1-times book value. The stock’s five-year-average book multiple is about 0.9. Thus, despite the aforementioned headwinds, the stock trades at an above-average valuation today.
That doesn’t make much sense. But, it’s been the case for the past year. BAC has consistently featured a price-to-book multiple of around 1. As it has, BAC hasn’t gone anywhere.
That’s not a coincidence. So long as the headwinds here remain intense and the valuation remains full, Bank of America stock won’t stage a sustainable move higher.
Bottom Line on BAC Stock
Bank of America stock has been on my “Sell” list for over a year now because the fundamentals haven’t been great (slowing economic growth, low rates, and flat/inverted yield curve) and the valuation has remained full at roughly 1-times book value, versus a five-year-average book multiple of 0.9.
Both of these dynamics remain in play today. The fundamentals remain weak. The valuation remains full. So long as these two dynamics remain in play, I’ll keep BAC stock on my “Sell” list.
As of this writing, Luke Lango did not hold a position in any of the aforementioned securities.
