It’s relatively simple to make the bull case for Bank of America (NYSE:BAC) at the moment. BAC stock has fallen a stunning 26% in just eleven trading sessions. And at these lows, the stock looks cheap — too cheap.
Most notably, BAC stock now trades below book value. Going back to 2017, it’s only dipped below one-times book on a few occasions. Each of those dips was brief and represented a near-term buying opportunity.
Earnings, too, make the stock look attractive. Shares now trade at less than 10x 2019 earnings per share. The multiple to the 2020 consensus EPS estimate — currently $2.97 — is under 9x.
Those multiples are the direct result of a selloff which appears driven by fears of the quickly spreading coronavirus. And while a significant near-term economic impact seems increasingly likely, the long-term case for BAC stock hardly is broken. To put it simply, this looks like an unjustified selloff and a buying opportunity.
I’m sympathetic to that case. I’ve recommended BAC stock in the past, most notably during the market’s last correction back in late 2018. But this time around, I’m not nearly as bullish. There are reasons why this decline makes sense, and reasons why investors looking to buy broader market weakness should focus their attention elsewhere.
We’ve Been Here Before
In terms of earnings and book value, BAC stock unquestionably is cheap. But it’s been some degree of cheap for most of the past decade.
Indeed, the stock traded below book value for years after the financial crisis ended. It didn’t clear 1x book until 2017, after a torrid rally following the November 2016 U.S. presidential election.
A sub-10x price-earnings multiple admittedly is out of line relative to recent trading, but not unprecedented. Relative to trailing 12-month figures, BAC stock received a single-digit PE multiple in both early 2016 and on several occasions last year.
It’s worth pointing out that shares rallied sharply on both occasions, and so history suggests that a PE multiple under 10x indeed is too cheap. Even so, the stock has been some degree of cheap for over a decade now. And there are reasons to believe that the stock right now should be cheaper than it’s been in years.
Not Just a Short-Term Problem
There’s more going on here than just fears of the coronavirus. In response to those fears, the Federal Reserve lowered its benchmark interest rate by 50 basis points last week. That follows just three cuts in 2019 alone.
All else equal, those cuts will pressure BofA’s earnings. They reduce net interest margin, the spread between what the bank generates from loans and what it pays to depositors.
Indeed, we’ve already seen that play out. In the fourth quarter, Bank of America’s net income attributable to common shareholders declined more than 4% year-over-year. A 3% decline in what the bank calls net interest income was a key driver.
This month’s rate cut will further pressure results in 2020. Last year’s moves already were expected to have a negative impact in the first half of the year. Meanwhile, traders are now pricing in another 75 basis point cut this month, and a return to zero rates would not be a surprise.
As a result, it seems increasingly likely that BofA’s earnings are going to decline for the full year. That doesn’t even include potential impacts from loan losses, weaker credit card results, and other macro-driven effects. Both rate and macro weakness could well linger in 2021 and beyond. In that context, BAC stock probably should be cheap.
Better Options Than BAC Stock
Again, I’m sympathetic to the case that BAC stock may be too cheap from a long-term standpoint. This still is one of the best banks out there: I’ve long argued that Bank of America and JPMorgan Chase (NYSE:JPM) are the two most attractive big bank stocks in the market.
But an investor buying Bank of America stock here has to have some faith that the U.S. economy will recover quickly, if it weakens at all. And if that turns out to be the case, there is no shortage of stocks that have fallen hard.
Indeed, other financials have struggled almost as badly. Over the last month, BAC stock has fallen further than other major financials — but not by much. It’s down 25%. JPM shares have fallen 21%. Wells Fargo (NYSE:WFC) and Citigroup (NYSE:C) both are off 22%.
Airline and other travel-related stocks have been routed but should recover if coronavirus fears are overblown. Many retailers have crashed. Casino stocks look intriguing, with Wynn Resorts (NASDAQ:WYNN) threatening a three-year low and U.S. plays like Penn National Gaming (NASDAQ:PENN) and Eldorado Resorts (NASDAQ:ERI) collapsing.
If the U.S. economy performs better than feared, BAC stock no doubt rallies. Other names rally further — and don’t face lingering challenges from a Fed funds rate that may return to or near zero for years to come. But if the fears are justified, BAC stock is unlikely to bottom before the market does.
In other words, this selloff is more logical than it might appear — and doesn’t yet seem to be a compelling opportunity.
Vince Martin has covered the financial industry for close to a decade for InvestorPlace.com and other outlets. He has no positions in any securities mentioned.