Early in the pandemic, I bought Bank of America (NYSE:BAC) stock for my retirement account. I believed interest rates would rise, and that when money cost money, the big bank would prosper. I was still confident in January 2022, but I was wrong.
Since the pandemic began abating, as interest rates have risen, BAC stock has been a poor investment. Over the last two years it’s down 38%, while the market has been flat. In 2023 it’s down 17%, while the S&P average is up 14%. I admitted this to myself and sold out of BAC in February. Is it time to get back in?
BAC Stock in Context
It’s not that Bank of America isn’t doing its job. It’s making more money than ever. But the market no longer values those earnings, giving it a price to earnings multiple of less than 8, and a dividend yield of 3.68%.
Bank of America kicks off the third quarter earnings season on Oct. 17. Analysts expect earnings of 80 cents/share, in line with last year. But that dividend doesn’t look great against a 4.8% yield on a 30-year bond.
All stocks that borrow or lend money have this problem. Rising interest rates cut the value of lower-yield paper held against deposits, as Silicon Valley Bank learned. Every bondholder is sitting on a loss of equity, even while collecting on the notes.
Of all the money center banks, Bank of America is taking more of this damage than any other. The bank put more of its money into long-term bonds than its rivals during the pandemic, and the value of those loans has plummeted.
The management at JPMorgan Chase (NYSE:JPM) has done a much better job with this than Bank of America, and that’s reflected in the stock price. JPM is up almost 9% this year.
Fortunately, BAC’s missteps don’t threaten capital. The bank still pays depositors 2% on their money, and its prime rate is 8.5%. Everyone else pays more. Just like me, the bank can afford to let old bonds mature, bank the interest, then buy a higher-yielding bond.
Finding the Turn
Once interest rates turn, or even stabilize, it will do wonders for Bank of America stock.
The value of all its loans will rise. The spreads between what it pays for depositor money and what it gets from borrowers will also rise. If long rates start coming down, Bank of America’s dividend will also look better, and that will prop up the stock price, too.
But that turn is unlikely to come until there’s clarity on the war front. It’s unlikely until there’s clarity on the policy front.
As a result there is bearishness about BAC stock right now. The charts look terrible. Results from its investment banking business, acquired during the 2008 financial crisis, look bleak. There are even two Tipranks analysts telling clients to sell the stock right here.
The Bottom Line
The turn will come. Interest rates will stabilize.
When that happens, Bank of America will benefit more than its peers, because it has been hurt more.
If you wait until after the turn, you’ll miss the easy profits. Even the hint of a turn sent BAC stock up 3% on October 10.
This makes BAC the safest speculation a long-term investor can make right now. You’ll likely get the dividend while waiting, but then earnings will rise, along with the PE multiple, and you’ll look like Warren Buffett.
As our Rich Duprey writes, Buffett hasn’t given up on BAC either.
As of this writing, Dana Blankenhorn did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
