The performance of Bank of America (NYSE:BAC) stock has continued to confuse investors. BAC’s fundamentals appear to be solid, and BAC stock looks slightly undervalued.
But BAC stock price cannot seem to move higher than the low-$30s. Worse for BAC stock bulls, macroeconomic factors and the actions of the Federal Reserve could trigger near-term doubts about its growth. As long as BAC’s immediate outlook is uncertain, investors should avoid launching new positions in Bank of America stock.
Bank of America Is Still a Long- Term Winner
On the surface, BAC stock looks like an undervalued, long-term winner. Its forward price-earnings (PE) ratio of around 10.7 comes in well below its historical average PE of 17.75. Moreover, analysts, on average, expect its earnings to climb a solid 8% for the year.
Also, its dividend has recovered. The company lowered its annual payout to a nominal 4 cents per share following the 2008 crisis. However, the company resumed hiking its dividend in 2014. Today, its yearly dividend of 72 cents per share yields 2.4%.
The price–book value ratio of BAC stock is 1.13, exceeding that of Citigroup (NYSE:C). However, it comes in well below the level of its peers such as JPMorgan (NYSE:JPM) and the beleaguered Wells Fargo (NYSE:WFC). BAC stock is also 46% below its all-time high of $54.90 set in 2006.
BAC Stock Faces Multiple Headwinds
All of these factors make BAC stock look like a buy. I still see it as attractive over the long-term. Unfortunately, some short-term issues will likely keep Bank of America stock largely rangebound for now.
For one, the stock set a post-financial crisis record high of $33.05 per share in March 2018. Unfortunately, since then, anytime BAC stock begins to approach that level, it inevitably pulls back from it. Price ceilings eventually break, but at times, they do not break easily. At the current BAC stock price of $30 per share, BAC stock price can only increase around 10% before it reaches the ceiling.
Those who believe BAC stock will have trouble exceeding the price ceiling can find plenty of evidence to support their assertion.Although the yield-curve inversion has reversed, recessions have often occurred within two years of such inversions. Moreover, the fact that the economy has expanded for ten-plus years increases the risk of a downturn.
Furthermore, the Fed yesterday announced that it would cut interest rates again. Although I do not expect the reduction to take BAC stock down much further, it could reduce the company’s profit growth.
Also, from a valuation and growth perspective, BAC does not compare well to Citigroup. Analysts, on average, expect Citi’s profits to climb 14.4% this year, compared to only an 8% gain for BAC. Moreover, Citi trades below its book value and at a forward PE of about 8.3. However, it faces the same price ceiling issues as Bank of America, and will likely face the same near-term headwinds.
Final thoughts on BAC stock
Investors have little to gain for now by buying Bank of America stock. Yes, the company is again producing modest, but consistent growth. It trades at a low multiple, and if not for the negative factors I outlined, I would recommend BAC stock both now and in the future.
Still, I believe those near-term factors will hold down BAC stock for now. Despite BAC’s compelling valuations and continuing growth, the $33.05 per share multi-year high has become a sort of ceiling for it.
Stock price ceilings do not break easily. Moreover, falling interest rates and a feeling that a recession will hit the U.S. economy can keep that upper limit in place. Furthermore, estimates indicate that Citi, whose stock trades at a lower multiple than BAC stock, will grow more rapidly than BAC.
That said, I would still recommend that long-term owners of BAC stock hold onto their shares. For one, the good news for bulls is that only another financial crisis can take Bank of America stock significantly down further from these levels. Also, if the price ceiling of BAC stock can be broken, I think its PE ratio will return to its long-term average of 17.75.
Unfortunately, I believe the current price ceiling will stay in place. For this reason, I would avoid buying any Bank of America stock at this time.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.