Everyone seems to love Bank of America (NYSE:BAC). Shares are up 36% for the year, beating even the 30% gain in the S&P 500. And it’s hard to find an analyst who will say a bad word about the company, possibly because it has beaten earnings estimates for four straight quarters.
Even with its gains, Bank of America remains a conservative play. Unlike tech stocks, whose values are built on expanding valuations, you can still get Bank of America shares for 12.4 times trailing earnings, with a 2.2% yield. The bank’s market capitalization is $301 billion, and it’s backed by over $2.4 billion of assets.
What could possibly go wrong?
Stretching for Value
For starters, the one-year price target of $33.90 is within pennies of its Dec. 6 opening bid of $33.68. Then there are the concerns of InvestorPlace’s Josh Enomoto.
Savings continue to decline. Loan growth is slowing. So is real estate. Enomoto is bearish on the general banking industry, so perhaps he’s an outlier.
A lot of wealthy investors are turning bearish as well. Over half are expecting a big drop in the market before the year is out, according to a recent UBS survey. That might be because there was a hard drop last year. For now, charts for well-capitalized stocks like Bank of America are all flashing green.
But all trends reverse.
My Worries
Recessions are like children. They’re all different, each different in their own way.
The last recession was based in the banks, which ran off to the dog track pretending they could take insurance on mortgage payments from people without money.
The next downturn looks more likely to be based in equities, with stocks now trading at 23.5 times earnings. The Shiller P/E ratio, meant to adjust for inflation and economic cycles, is flashing danger at 30, close to where it was just before the 1929 crash.
There’s no one on Wall Street with memory of those days. There are hardly any of us who remember the 1987 “Black Monday” crash. The point is there’s a lot of money sitting in liquid-risk assets whose value could plunge with one big sell order.
Easy Reversal
The ease with which all this could reverse is seen as a plus for Bank of America, which is positioning itself at the center of the fintech transition.
Replacing mainframes and teller machines with clouds and apps means that, in theory, you can get out before the door slams shut on the bull market. That’s an interesting theory. History shows such theories never meet the test of reality.
As this is written, the value of all the stocks on the New York Stock Exchange is almost $29 trillion, and that of the Nasdaq is $11.1 trillion. If even 10% of that market cap decides it wants out tomorrow, will the rest retain its value?
The Bottom Line on Bank of America
Everyone knows today there is too much money chasing too few assets.
Financial spigots have been wide open for a decade, and the gusher has everyone covered in value.
But you don’t have a profit until you sell an asset and have the cash in your hand. Banks like Bank of America may not be at the center of the next downturn, but they’re bound to be hurt by it. They may make safe havens during the storm, but probably not at current valuations.
When everyone is screaming “buy, buy, buy,” I think “sell, sell, sell.”
Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time 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.
