It’s easy to see why investors are excited about Bank of America (NYSE:BAC) stock. Many bank stocks such as JPMorgan Chase (NYSE:JPM) and Wells Fargo (NYSE:WFC) had prosperous years in 2019. Still, BAC stock stood out from the rest. As much as investors cheered that result, the majority of the stock’s gains happened in the fourth quarter. In the last three months of 2019, BAC stock price rose nearly 24%.
In fact, Bank of America has reported strong earnings growth over the prior five years (ending in 2018). And the bank’s earnings are projected to grow 12.7% in 2020. That would be in line with the five-year industry average of 12.7%.
However, when banks stocks start behaving like small-capitalization growth stocks, it gives me pause. And that’s why it’s important to remember that bank stocks are traditionally among the more conservative elements in your portfolio. There may be reasons to like BAC stock but be sure you’re buying it for what it is.
BAC Stock Is a Favorite of Warren Buffett
As I wrote back in December, Bank of America’s fourth-quarter surge in 2019 was likely due, in large part, to the “Buffett effect.” Put another way, when the “Oracle of Omaha” speaks, investors tend to listen. In October 2019, Buffett’s holding company, Berkshire Hathaway (NYSE:BRK.A, NYSE:BRK.B), petitioned the federal government to increase its stake in BAC stock.
As I also mentioned at the time, BRK’s investment in Bank of America has been increasing organically, likely due to BAC’s stock buyback program. So, Buffett was not necessarily giving investors a buy signal. Still, Buffett does not hold on to stocks that he doesn’t believe in. And BAC is among his largest holdings.
However, as I see it, there are 3 reasons Bank of America stock will come back to reality in 2020.
The Economy Is Still Uncertain
The chances of the U.S. economy dipping into recession in 2020 are going down. But to assess the broader economy, you have to look beyond a rising stock market. After all, investors can make an argument that the equities market has become decoupled from the broader economy.
In making a bullish case for BAC stock, my colleague Luke Lango made the argument that the economy should get a jump start from an ease of tensions between the U.S. and China. And Bank of America is preparing for a big year with aggressive expansion plans.
That’s fair. But what if the economy doesn’t grow as planned? The “phase one” deal that is expected to get signed is, by most accounts, window dressing. The main event is still to come and there’s no reason to believe that it will not be contentious.
I consider myself to be a realist when it comes to the economy. And right now, there remain too many ifs and buts for me to make any firm conclusions for 2020.
BAC’s Investment in Digital Is Table Stakes
Much is being made of Bank of America’s investment in its information technology (IT) infrastructure. And that is significant if for no other reason than to cut costs.
However, when looking at their investment in consumer-facing technology, I’m less jazzed. In my opinion, traditional banks are doing what is necessary to catch up to the fintech companies who have already been offering these services. Having an efficient, streamlined mobile/digital experience is what consumers expect. I don’t see Bank of America being a game changer in this area.
The Stock Appears to Have a Premium Value
This depends, I suppose on whom you ask. There are some that would point to the company’s price-to-book (PB) ratio and price-earnings (PE) ratio as evidence that it is trading at a discount to the market. However, my InvestorPlace colleague Will Ashworth wrote that at least one analyst does not see the BAC stock price as a bargain.
In the article, Ashworth wrote that BMO Capital Markets analyst James Fotheringham downgraded BAC from “outperform” to “market perform” solely based on its valuation. Fotheringham further stated that BAC shares were trading at a premium to their long-term historical average.
When Is a Bank Just a Bank?
At their core, bank stocks are fairly stable. Single-digit growth is considered to be the norm. Bank of America stock had an impressive run in 2019. But as the saying goes, past performance is not the best predictor of future results.
It would seem more likely that BAC stock comes back to earth in 2020. That doesn’t make it disappointing, it just makes it normal. And normal can be good. Bank of America is a solid bank stock. But it is a bank stock so manage your expectations accordingly.
As of this writing, Chris Markoch did not hold a position in any of the aforementioned securities.
