As the U.S. economy reopens for business, things are looking up for Bank of America (NYSE:BAC). That makes Bank of America stock an interesting play here.
With a V-shaped economic recovery looking increasingly likely, and federal stimulus measures that include rock-bottom interest rates providing underlying support, Bank of America’s stock price is looking increasingly attractive below $25 per share.
The share price has already risen more than 50% since it bottomed on March 23. That even outpaces the S&P 500, which has risen nearly 40% in the same time span. As the economy ramps up over the summer, BAC stock looks likely to run even higher. Many analysts expect Bank of America stock to surpass its pre-pandemic high of $35.72 a share.
Bank of America Stock Is Undervalued
Despite its recent run, and the fact that it is the second largest bank in the United States, BAC remains undervalued. The stock price is still down 20% year-to-date. And shares currently trade for 7% less than book value. Bank of America is at a historically low valuation when you consider that the shares have traded at a 25% premium over the past few years.
The current low valuation is surprising given how well Bank of America had been performing prior to the novel coronavirus. In 2019, the bank produced a return on equity of 14.9% and a return on assets of 1.2%, demonstrating improvement in overall profitability. Growing investments in technology and rigid expense management have also improved Bank of America’s efficiency ratio. These efforts place it among the best in the banking sector.
Additionally, Bank of America remains a dividend powerhouse — returning more than $95 billion to shareholders since 2013 — and making the stock a favorite of investors such as Warren Buffett. Bank of America has grown its dividend by 50% over the past three years and the yield now stands at a healthy 2.7%.
The bank has also aggressively repurchased its own stock, and the total outstanding BAC share count has dropped by more than 20% since 2013. If this news weren’t good enough, Bank of America’s research and investment banking division has been going gangbusters. Trading revenue is up 22% in the first quarter amid global stock market turmoil. Management continues to focus on diversifying revenue streams and running operations in the most efficient ways possible. Overall, this is news that has investors praising Bank of America.
Loan Exposure Is a Concern
There are two reasons why Bank of America stock is undervalued. First, the entire banking sector has been one of the last to rebound from the depths of the Covid-19 lockdown. Retail and investment banks such as Citigroup (NYSE:C), Goldman Sachs (NYSE:GS) and Wells Fargo (NYSE:WFC) have all been slow to recover from March lows. This sector is only now starting to run-up in price, and many stocks remain below their previous 52-weeks highs.
Second, all banks have suffered over concerns about their exposure to loans that could turn sour amid unprecedented job losses and strained household incomes.
In terms of potentially problematic loans, Bank of America had $94.5 billion in credit card loans outstanding in the first quarter. It also had $16.4 billion in loans to the volatile energy sector, and $70 billion of commercial real estate loans comprised of retailers and other businesses. While management set aside $3.6 billion in the first quarter to cover anticipated loan losses, some analysts have questioned whether this will be enough.
The second quarter will likely be worse in terms of loan defaults. In others, investors will have to wait and see how it plays out for Bank of America.
One Reason for Optimism
Bank of America has the resources to manage non-performing loans regardless of the final tally. And with the economy reopening at a brisk pace, May employment rebounding and stock markets nearly back to their February highs, there is reason to expect Bank of America to continue performing strongly. With that same logic, BAC stock should push higher in the coming weeks and months.
While Bank of America was among the hardest-hit bank stocks in March, it also presents attractive growth opportunities during the recovery period.
Among 17 analysts who have 12-month price targets on BAC stock, the median price target is $28.67. The high forecast is $36 per share and a low forecast of $21 a share. As mentioned above, the high price target would represent a new 52-week peak for the stock. Of these analysts, 11 have buy ratings and six have hold ratings. No analysts have sell ratings on the shares.
The Bottom Line on Bank of America
The American banking sector as a whole is in good shape. And there are plenty of bank stocks that offer attractive buying opportunities at their current per-share prices. However, when you combine financial results, stable management, dividend payments and overall value, it is hard to find a better long-term investment in the banking sector than BAC stock.
Bank of America has weathered the Covid-19 storm and is now rising along with the U.S. economy. Investors would be wise to grab shares before the price rises further.
Joel Baglole has been a business journalist for 20 years. He spent five years as a staff reporter at The Wall Street Journal, and has also written for The Washington Post and Toronto Star newspapers, as well as financial websites such as The Motley Fool and Investopedia. As of this writing, Joel Baglole held shares of BAC, GS and C.