Recession risks, mortgage worries and credit concerns crushed the banking industry. Throw in near-zero rates and suspend the buybacks, and it’s no wonder Bank of America (NYSE:BAC) and its peers went out of favor. At its trough, Bank of America stock fell 49% from its 2020 high.
With that fall a few months behind us, it’s easy to look at the situation in hindsight. But at the time, the decline came in stunning fashion. It came only a month after the industry reported impressive quarters, and as many bank stocks paid a solid dividend yield and were buying back gobs of stock.
Amid the selloff, where investors were selling first and asking questions later, it simply didn’t matter. And for banks, a recession equals “sell” in the minds of many investors.
However, with the prospect of a sharp economic decline followed by a sharp rebound, investors are starting to warm up to the banks again. Is that a mistake?
Let’s dive into this topic.
Valuing Bank of America Stock
Whether they admit it, many investors are still scarred by what happened in 2008. The economic decline was painful and prolonged, with the banking system on the edge of a cliff.
This time, though, it’s much different. The consumer is in a much stronger spot. Unemployment was at a record low before the novel coronavirus crisis. The banks are also incredibly strong with robust balance sheets compared to 2008, while the real estate market wasn’t built on hot air like it was more than a decade ago.
With that all said, banks will struggle in the current environment. Earnings estimates for Bank of America stood at $3.03 per share for fiscal 2020 just three months ago. Now the consensus stands at just $1.45 per share, down more than 55% in a few months.
Heck, even 30 days ago estimates were at $2.55 per share.
Should Bank of America report in line 2020 sales and earnings results, it will represent declines of 6.6% and 47.3%, respectively. Worse, earnings estimates for 2021 stand at just $2.22 per share, down almost 20% from the $2.75 per share BAC earned in 2019.
Presently, that values Bank of America stock at 16.6 times this year’s earnings estimates. And while that not an egregious valuation compared to the overall market, that is a pricey valuation compared to BAC’s historic valuation — as well as the industry. For what it’s worth, BofA has tended to trade for about 10 to 12 times earnings.
That said, it’s hard to base too much of one’s thesis on forecasts given these uncertain times. BAC does pay a 2.9% dividend yield, and should be fine in the long term. Its lack of a buyback does hurt demand for its stock, but eventually that too will be reinstated.
Trading BAC Stock
It took just a few days for Bank of America stock to completely fall off a cliff. After trading comfortably in the low- to mid-$30s, shares crumbled right through the $30 to $31 area. This zone was multi-year resistance and was expected to be support. And in a regular environment, it likely would have been.
However, this situation was extreme. And as such, former resistance didn’t hold as support. Heck, even former support didn’t help BAC stock. In fact, this level is now acting as resistance. That comes into play near $26, which was former range support. Bank of America stock was clearly rejected from this mark last week. It also rejected at the 200-week moving average.
With that in mind ,and with the S&P 500 up tremendously from the March lows, investors may consider waiting for a larger dip. That doesn’t go for just BofA, but also JPMorgan (NYSE:JPM), Goldman Sachs (NYSE:GS) and others.
On a decline, though, I want to see if Bank of America can avoid taking out its April low at $19.51. However, a close over $26 puts notable upside back on the table.