In early December, I wrote about three Buffett-owned stocks that had outperformed Bank of America (NYSE:BAC) on a year-to-date basis. One of them was a bank, another was a tech/consumer products company, and the third a discount retailer.
In the month since that article, Bank of America stock has gained more than 7%, putting its 2019 gains at 44%. Not too shabby. On a total return basis over the past year, BAC stock has generated a 45.4% return.
By comparison, the three Buffett-owned stocks I discussed in early December: JPMorgan (NYSE:JPM), Apple (NASDAQ:AAPL), and Costco (NASDAQ:COST) have one-year total returns of 45.4%, 92.1%, and 43.6%, respectively.
For anyone concerned about stock valuations getting ahead of themselves, an excellent option in 2020 might be to buy Berkshire Hathaway (NYSE:BRK.A, NYSE:BRK.B), so that you get a little piece of all four without as much company risk. After all, Berkshire is a diversified mutual fund in disguise.
As for Bank of America, it gained almost 21% in the final three months of 2019, its best quarterly performance since 2016. Early in 2020, investors are wondering if BAC is a buy, sell, or hold.
Bank of America Stock Is a Buy
Warren Buffett is a big booster of Bank of America stock. It continues to be Berkshire’s second-largest equity holding valued at more than $33 billion. The Oracle of Omaha’s company owns 10.5% of its BAC stock. In October, Berkshire petitioned the Federal Reserve to be able to raise its stake above the 10% threshold.
While Buffett is unlikely to increase his stake beyond the approximately 948 million BAC shares Berkshire owns, it did send a signal to investors that Bank of America stock is a “buy.” Over the next three months, investors piled in.
However, I don’t think you can underestimate the value of Buffett’s endorsement. If Berkshire wasn’t BAC’s largest shareholder and petitioning the Federal Reserve to keep it that way, I don’t think you would have seen quite the same performance by the BAC stock price in the fourth quarter.
As for fundamentals and its actual business, InvestorPlace’s Tom Taulli recently pointed out that the bank’s loan portfolio grew by 4.6% overall in the latest quarter with a 7% boost in commercial loans. As it continues to build out its team of regional bankers across the U.S., its loan business will continue to grow.
Furthermore, the bank’s making great strides with digital banking, which could provide higher retention of customers, in good times and bad.
BAC Is a Sell
Since the 2008 recession, Bank of America has done an excellent job of becoming a leaner organization, which has led to reasonably robust net interest margins despite falling interest rates in 2019.
However, as my colleague Josh Enomoto recently stated, Bank of America’s bread-and-butter customer is the consumer, despite diversifying into wealth management and investment banking. If the consumer fades, BAC fades.
Josh goes on to suggest that there’s a potential auto loan crisis building in this country with defaults on those loans the highest they’ve ever been. There are many Americans who are BAC customers that aren’t doing as well as the economic data would suggest. Those people are going to suffer further if we slide into a recession in 2020.
Now, the odds of a recession aren’t all that high as we start the year. Earlier in 2019, the odds got as high as 50% but have since fallen to 33%. But if manufacturing continues to contract as it did in the second half of last year, that’s not going to be good for BAC or many other banks for that matter.
Finally, BMO Capital Markets analyst James Fotheringham downgraded BAC from “outperform” to “market perform” Jan. 3 solely based on its valuation. Fotheringham stated in a note to clients that “BAC shares now trade at a premium to their long-term historical average.”
The analyst believes that Citigroup (NYSE:C) and Morgan Stanley (NYSE:MS), which both trade at discounts to their long-term historical averages, make better buys at this point.
It’s a Hold
I believe that at some point in 2020, you’ll be able to buy BAC stock below $30.
So, if you own Bank of America stock and believe Warren Buffett is right about the bank, you ought to put some cash aside to buy more at a better entry point. I don’t think given the current facts available that you should be a seller.
If you don’t own BAC, I would wait for a better entry point later in the year. In my opinion, the bank’s stock is a hold.
At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
