Consider Bank of America Stock a Buy If Markets Retest Lows
Shares could tread water for quite some time, so wait for a pullback before making a buy
[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 BAC stock still down around 29% off its 52-week high, these headwinds could already be priced into shares.
Yet, buying the dip 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 come to an end.
Many of the businesses on 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 May 14, “this isn’t 2008″ for bank stocks. Firstly, it’s the pandemic, not poorly-capitalized banks, driving 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.
Well Fargo’s Mike Mayo recently said in a research note that “Goliath is winning” due to big changes in the banking sector. In other words, major banks like Bank of America are gaining a greater edge over smaller rivals like mid-sized and community banks.
“Social distancing” is accelerating the move from branch banking to digital banking. This could mean banking consolidates further, to the benefit of large financial names like BofA.
In short, the bank could come out of this crisis stronger than before. Or can they? Going into the pandemic, the big banks were financially strong.
But, what happens if default rates on mortgages and auto loans start to go up? How about commercial real estate loans? There are many ways things could get worse for the big banks’ respective balance sheets.
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 long as the Federal Reserve keeps rates super-low to bolster the economy, the company could face issues returning to prior levels of profitability. However, recent remarks from Federal Reserve Chairman Jerome Powell may mean we won’t see negative interest rates anytime soon. In other words, this issue may not get worse going forward.
Also, the current crisis means share buybacks are out of the question. Prior to the outbreak, buybacks and dividends helped move the needle for Bank of America’s stock holders. But now, with buybacks on hold, this catalyst is off the table.
Yet, canceling buybacks could ensure banks stay well-capitalized. This could also mean dividends remain safe, despite lingering fears of bank stock dividend cuts. A stable dividend could mean shares at least stay at their current price level.
In short, Bank of America probably won’t rally back to $35 per share anytime soon. But despite low interest rates hurting profits, suspending buybacks could help secure the bank’s dividend. This may mean shares continue to hold steady after hitting the $25 per share 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 in April. But, even as shares are trending upward, it may pay to “wait-and-see” if you haven’t entered the stock yet.
It could be a long time before shares retrace 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 $25 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.