In a world where the Federal Reserve continues to drop cash from helicopters, Bank of America’s (NYSE:BAC) BAC stock is worth little more than payment processor Paypal (NASDAQ:PYPL).
As markets opened Aug. 13, Bank of America and its $2.4 trillion of assets was trading at about $26.70, a market cap of $231 billion. Paypal, with $63 billion in assets, was worth $224.5 billion.
How does that happen? As I’ve learned in a 42-year career writing about business, money sitting in a vault is just potential energy. Money that’s causing value to be exchanged is money at work. Processors put money to work. Banks mainly hold it.
But this too, shall pass. When money becomes money again, will you, like Warren Buffett of Berkshire Hathaway (NYSE:BRK.A, NYSE:BRK.B), want your money in a BAC stock, or a fintech?
Buffett and BAC Stock
Buffett still believes in Bank of America. Having launched his position with warrants in the wake of the last decade’s financial crisis, Buffett is still buying BAC. It’s his second-largest holding after Apple (NASDAQ:AAPL). He bought $2.1 billion more in the last quarter alone.
Buffett likes BAC’s return on tangible capital. This was 11.6% in the second quarter. Loan losses meant net income in that quarter was half what it was a year earlier, at $3.3 billion. But if the worst of the pandemic is over, and the bank has added $4 billion to reserves in case it’s not, more capital should be flowing to shareholders soon.
So long as money is basically free, which it will be through the pandemic, Bank of America admits its results will remain under pressure. The bank thinks “recessionary impacts” from the pandemic could extend into 2022.
But the key to successful investing is to buy when others are selling. Buffett isn’t the only investor with newfound confidence in the old bank. Did you know it’s the most popular financial stock on Robinhood?
Big Bank Comeback?
Big bank stocks will come back only when money becomes worth paying for again. A vaccine, which would end the pandemic, might cause that to happen. A President Joe Biden, investing in hard assets like solar panels, might make that happen.
Investors like Buffett are discounting present performance and looking over the horizon to a day when today’s crises are past and new ones emerge. They’re listening to BAC CEO Brian Moynihan, who sees the economy growing in 2021 and needing cash.
Instead of chasing today’s COVID-19 plays, the stay-at-home stocks, the vaccine stocks, and the like, Buffett is saying stay diversified. Yes, Bank of America is increasing loan loss reserves. Yes, its present quarter will be hampered by losses. But it will have a strong cash position at the end of the year and you buy stocks for tomorrow, not yesterday.
The Bottom Line
Right now, you can buy Bank of America stock at one-third off its price at the start of 2020. It sells at a discount to its book value after selling at one-fourth over that value in February.
Analysts at Trefis see the bank’s earnings per share bottoming this year at $1.73, but net interest margins taking that up to $2.43 per share next year. That means the stock is now trading at just 11 times next year’s earnings. With a healthier market, it could easily sell for $30 per share.
Even Bank of America’s current 16 cent per share dividend yields 2.7%. This, at a time when government bonds yield under 1%. That dividend should head higher next year. As the market tilts toward value, Bank of America is starting to look attractive.
Dana Blankenhorn has been a financial and technology journalist since 1978. His latest book is Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, essays on technology available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in AAPL.
