The market has been rather ho-hum lately about financial stocks like Bank of America (NYSE:BAC) stock. I get it. Bank of America doesn’t have the sex appeal of a high-flying tech company.
Let’s be honest. An economy weighed down by the novel coronavirus means the environment for a lot of businesses is not ideal.
So, the market is fickle. The economy struggling during the pandemic. All of that doesn’t necessarily mean it’s a bad idea to buy bank stock. Maybe it all means a patient investor should do the opposite.
To help you find out, here a simple three-step test:
- Is the bank solid?
- Is the bank taking care of its customers?
- And, is the bank reacting appropriately to external events?
If the answers are yes, then there’s no reason a potential investor should ignore the sector. After all, you’re just shopping around at this point. There’s no harm in learning more about a bank or two as well as the sector in general. Knowledge is power. And, if you don’t own financials, diversification is always a good move.
Looking at BAC Stock
Bank of America is a multi-national financial services company based in Charlotte, North Carolina. It is the second-largest bank in the United States, behind JPMorgan Chase (NYSE:JPM). In a wider perspective, Bank of America is the eighth-largest bank in the world.
Because of its size, the bank was one of several given special attention during the Great Financial Crisis as government officials sought to stabilize the financial sector.
Now, several years later, Bank of America has emerged stronger – and hopefully more cautious – than some of its competitors. A smart management team will show it learned hard lessons and carefully steer the massive bank through today’s choppy financial seas. If done well, investors will enjoy income from the bank’s dividend.
BAC stock has reflected some of this year’s volatility but its range also shows the stock’s maturity. Shares hit a high in the last year of $35.72, while the 52-week low was $17.95. BAC is currently trading around $24 and change.
On Oct. 14, BAC stock fell about 2% after the company announced its third-quarter earnings. The bank’s $20.4 billion in revenue, an 11% percent decline (compared to the same quarter a year ago), probably triggered the dip. Net interest income was down some 17% year-over-year. Both of those numbers are driven by the historically low interest rates pursued by the Federal Reserve to support the ailing economy.
Given the poor economy, I was impressed that BAC earned 51 cents per share during the quarter. But the $4.9 billion was a 16% drop in year-over-year profit.
Warren Buffett Makes a Move
Most investors love to see what famed investor Warren Buffett is up to with money. It is interesting and instructive to learn of trades by his Berkshire Hathaway (NYSE:BRK.A, NYSE:BRK.B) holding company in Omaha. This holds true despite it acts on a scale few other investors can match.
Buffett is a longtime fan of financial firms and his stakes in them are well known. However, as my InvestorPlace colleague David Moadel wrote recently, the Oracle of Omaha boosted his BAC stock holdings.
Moadel says “it’s particularly notable that Buffett chose to add to his BAC position even while lightening up on other bank stocks.”
According to a regulatory filing, Berkshire sold shares in other banks while buying more than 13 million shares of BAC from July 31 to Aug. 4. That comes to about $337 million. Berkshire now owns about 1 billion Bank of America shares worth some $25 billion.
“Without saying a word, Buffett’s making a loud and clear statement about his outlook for Bank of America,” Moadel says.
The Bottom Line
What does this mean for the average investor? One thing for sure, watching what Buffett does is worthwhile. But his actions don’t need to be your actions. Each investor needs an individualized financial plan, and it’s very possible investing in financial companies will fit within your plan.
However, investing in value stocks is a tried-and-true Buffett strategy.
Bank of America looks to be an attractive value play at this time. The bank passes the three-step test at the beginning of this column. It has been actively managing reserves to cover itself in the event of borrower defaults. So, BAC stock looks poised to gain once the Covid-19 pandemic is brought under control – whenever that eagerly awaited milestone is reached.
Meanwhile, Bank of America will pay investors a dividend to go along for the ride.
In this case, patient investors should join Buffett and buy BAC stock.
On the date of publication, Larry Sullivan did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Larry Sullivan is a veteran journalist in Florida who has covered banking and finance for several years. He is a former investing editor at U.S. News & World Report in Washington D.C.