[Editor’s note: “Consider Bank of America (BAC) Stock a Buy If Markets Retest Lows” was originally published on March 23. It has since been updated to reflect the most relevant information available.]
As the recent market rebound continues, is Bank of America (NYSE:BAC) a buy? Perhaps. The novel coronavirus and low interest rates will affect the bank’s near-term results. But, with shares holding steady around $24.50 per share, the worst may already be priced into shares.
Yet, buying now still seems risky in today’s market — even if markets have recovered from their March lows. There’s a lot more that could go wrong, even as “shelter-in-place” orders enter the rearview mirror.
Many of the businesses coming out of lockdown are highly levered. But with their balance sheet stronger than in the last recession, Bank of America can weather the current storm.
In short, Bank of America remains a strong opportunity. But it may pay to wait for another pullback before entering a position.
Is It 2008 Redux for BAC Stock?
The market so far in 2020 may feel like a “throwback Thursday” to the issues faced in the 2008-2009 “Great Recession.” Yet, bank stocks like BAC may fare better this time around.
As InvestorPlace’s Luke Lango put it on Jun 18, “this isn’t the financial crisis again″ for bank stocks. Firstly, it’s the pandemic-driven lockdowns, not poorly-capitalized banks, causing today’s economic slowdown. Secondly, in the twelve years since the financial crisis, banks have become better capitalized. In fact, according to Lango, banks could be part of the solution to today’s problems.
How so? With their strong balance sheets, they can provide the financing to help hard-hit industries stay in business. Yet, this is not the only reason why 2020 may not be so bad for the big banks.
Namely, the much-touted V-shaped economic recovery may already be starting. Recent performance metrics appear to back up this scenario, as credit card net charge-offs and delinquency rates continue to fall.
In short, we may be quickly recovering from this spring’s maelstrom. Or are we? So far, stimulus checks, increased unemployment benefits, and PPP loans have helped soften the blow to American households and small businesses.
But, what happens when this money runs out? Without a second stimulus bill, tough times could continue, even after the pandemic fades away. In short, default rates on mortgages and auto loans could increase. Commercial real estate defaults could climb as well. There are many ways things could get worse for the big banks’ respective balance sheets. Even now, it’s still too early to tell.
Big Upside Is Questionable for Bank of America
The pandemic is not the only overhanging risk for the bank stock. Near-zero interest rates could also be a factor impacting profits in the near-term. As the Federal Reserve plans to keep rates super-low until 2022 to bolster the economy, the company could face issues returning to prior levels of profitability. Federal Reserve Chairman Jerome Powell may have quelled fears of negative interest rates. But, with one Fed economist calling for negative rates to spark a V-shaped recovery, America’s central banking system could wind up changing their tune.
Also, the current crisis means share buybacks are out of the question. This big bank put its buyback program on hiatus through the second calendar quarter. There’s a chance the company could resume buybacks, if they pass their upcoming Fed “stress test.” But it’s no slam dunk whether this past needle-mover for the stock will soon be back on the table.
Yet, canceling its buyback program may ensure this bank stays well-capitalized. This could also mean their current dividend payout remains safe, despite lingering fears of bank stock dividend cuts. A stable dividend may help ensure shares don’t head lower from today’s prices.
In short, even with investor enthusiasm, it may take a while for BAC stock to rally back to $35 per share. But despite low interest rates hurting profits, suspending buybacks could help secure the bank’s dividend. This may mean shares continue to hold steady at today’s price level.
Consider BofA on a Pullback
Investors who bought stock in BAC at its lows (around $18 per share) saw quick gains as markets rebounded through the spring. But, even as shares are trending upward, it may pay to “wait-and-see” if you haven’t entered the stock yet.
Shares may dip before retracing past highs (around $35 per share). With this in mind, the risk/return proposition may not be in your favor at today’s prices (around $24.50 per share).
Yet, on a pullback, the potential return may exceed risk for Bank of America. Keep shares on your radar. But take your time before entering a position.
Thomas Niel, contributor to InvestorPlace, has been writing single-stock analysis for web-based publications since 2016. As of this writing, Thomas Niel did not hold a position in any of the aforementioned securities.