You’ve heard it a thousand times from pundits: “the banks cannot hold a rally.” We thought that this sentiment died last year, but it is rearing its ugly head again. I have had many discussions lately where traders are back to believing that bank stocks are where money goes to die. Bank of America (NYSE:BAC) stock is perhaps the poster child of a boring bank, but therein lies the opportunity. BAC stock may be boring, but when things are as wild as they are now, boring is beautiful.
While the world is still suffering from the huge implications of a worldwide quarantine, banks are sitting pretty. U.S. regulators made sure that after the 2008 debacle, banks would be financial fortresses.
Yes, some of them may have exposure to loan losses from the millions of businesses that won’t survive the novel coronavirus crisis. But the government is doing all it can to minimize the impact on the economy and that adds a layer of protection to what the banks are already doing. The JPMorgan (NYSE:JPM) team just reported earnings and in it they boosted loan loss provisions knowing what is at stake. They also did this last year, so there are no guessing games here and everyone is ready.
BAC Stock Will Benefit From the Government Relief Package
This is the first recession that was scheduled as if it were a lunch date. The world decided it wanted to take the most severe medicine against the virus to spare hospital infrastructure. And now the powers that be are readying the printing presses to foot the bill for global re-ignition costs.
Make no mistake about it, we have never seen this many zeros in a relief effort ever before. Hopefully the leaders can pull it off. The initial package for the U.S. was $2 trillion; part of it was for citizens and the rest for businesses so they don’t fire their employees. The money quickly ran out and last night, they authorized an additional $500 million to add to the Small Business Administration program.
It Also Stands On Its Own Two Feet
Fundamentally, BAC stock is definitely cheap. But that has almost always been the case except for just before the crash. All banks got too expensive, but not from an absolute value. The valuation metrics strayed too far from their norm, so it was a matter of relativity. Currently Bank of America has a price-to-earnings ratio of 9 and sells at 0.8 times its book value.
Wall Street is not even giving it full credit for its assets. Owning it here is not likely to be a colossal financial mistake. Of course there is always the chance of a black swan event, but we just had one and the odds of having two this close together is unlikely.
Technically, BAC stock had a 40% rally off the Covid-19 low. But it is now stuck just below short-term resistance near $23. There are also longer-term headwinds higher at $25.30, which was the level where the bounce failed. The important bit is that there is support below and it should be bullet proof. The virus crisis test was as harsh as they come, so the weak hands have definitely left the stock already. Those who are still long have better conviction here.
The ‘TINA’ Effect
The phenomenon called “TINA” which refers to the fact that “There Is No Alternative” for global money but to buy U.S. bonds also applies to bank stocks. Part of the method by which the governments are propping up their economies is through having low rates to encourage borrowing.
In essence, the global central banks are in a race to the bottom, except that they went beyond. The whole world has negative rates, so many will turn to stocks as they seek fixed incomes. So the actions of the Federal Reserve and the ECB (among others) are forcing conservative investors to go into risky assets like stocks. Among those, banks with fortress balance sheets look like super models. Bank of America is mostly domestic, so it has little exposure to the dark matters that may exist outside the U.S. This makes its 3.2% dividend yield, especially attractive among the group.
Nicolas Chahine is the managing director of SellSpreads.com. Join his live chat room for free here. As of this writing, he did not hold a position in any of the aforementioned securities.
