Its banking model was primarily geared to the middle-class, created as a financial institution to service the waves of immigrant families arriving in Northern California at the turn of the 20th century.
It wasn’t until 1930 that the bank hung a new shingle outside its branches, thus launching the prominent Bank of America brand. That rolled out as struggling Americans were looking for financial help as the Great Depression raged throughout the country.
[See: 9 Out-of-Consensus Stocks to Buy.]
Both the U.S. and Bank of America survived the depression and, thanks in major part to its purchase of Merrill Lynch (purchased in 2009), Bank of America is one of the largest banks in the U.S. with $2.3 trillion in assets under management, second only to J.P. Morgan Chase & Co. ( JPM).
In 2018, however, bank stocks have largely underperformed against broader markets, and BAC is no exception, as financial institutions grapple with stronger digital competition, higher interest rates and an increasingly negative outlook on financial services in the next year or two.
Can Bank of America claw back and keep riding the larger economic wave rolling across the U.S. in late 2018?
Some savvy Wall Street insiders say, “don’t bank on it.”
BAC stock at a glance. BAC stock had a lackluster year in 2018, with share prices down 6 percent on a year-to-date basis compared to a gain nearly 2 percent of the S&P 500 index.
Bank of America is trading at $28 per share. Consensus analyst expectations peg the bank’s one-year share performance stock at $34 per share, at the top of the stock’s 52-week trading range of $26-to-$33 per share.
Overall, BAC shares are up 1 percent in the past 52-week trading period, and the stock is trading below its 200-day moving average. October has been particularly painful for BAC shareholders, as the stock has fallen 7 percent in the last month. BAC’s forward annual dividend yield stands at 2.1 percent.
There is good news on the horizon. On its next earnings release, on Jan. 16, Bank of America is expected to report earnings of 65 cents per share, a year-over-year uptick of 38.3 percent, according to Zacks Investment Research. Quarterly revenues are expected to rise by 9.75 percent, to $22.4 billion.
Pros to buying BAC stock. With Bank of America stock spiraling downward, is there a decent buying opportunity with BAC?
Possibly, but it’s going to take some time to see robust returns.
“Bank stock valuations have come down over the past month on concerns that the economy is late in the cycle and the impact that could potentially have on loan growth and credit costs in 2019 and 2020,” says Michael Cronin, investment manager for U.S. equities at Aberdeen Standard Investments. “Although the valuations are more attractive now, the market will likely need to gain comfort that economic growth is going to be stable or accelerate over that period before it gets excited about the group again.”
Cronin says that BAC is a “well-run company” and that management has done a good job of reducing costs and simplifying the bank by exiting non-core products and assets in past years. “We currently own the stock on expectations for improved returns and continued strong positive operating leverage,” he says.
Cons to buying BAC stock. Myriad impactors — most of them negative — appear to be standing in the way of Bank of America share growth.
“The factors impacting bank stocks are rising interest-rate environment, geopolitical trade risks, and a decline in mortgage originations and refinancings,” says Ed Handschuh, a longtime financial advisor and now the CEO of 1Konto, a crypto brokerage firm trading across multiple exchanges. “These areas of concern have caused poor year-to-date performance in the banking sector even though the banks have reported generally positive earnings results.”
He adds, “Unfortunately, I don’t see the sector performance picking up until there is more clarity around rates and geopolitical issues.”
As for Bank of America, Handschuh is cautious, although there are slivers of light piercing October’s gray clouds.
“The bank is well-run and has performed well since the 2008 financial crisis,” he says. “Chief Executive Officer Brian T. Moynihan has done a fantastic job modernizing the institution, cutting workforce, implementing artificial intelligence and digital strategies to streamline business units. These changes have positioned BAC well in terms of operating costs, but might not be enough for a potential downturn in business activity due to rising rates and the outstanding geopolitical risks.”
Overall, though, Handschuh remains bearish on banks. “Due to the risk factors involved, I see the banking sector continuing to underperform the market average,” he says.
Other professional investors agree that, for now, keeping BAC at arm’s length is a good idea.
“There are a few reasons to stay away from BAC,” says Andrew Schrage, CEO of Money Crashers, an investment and personal finance digital platform. “A top one is the current plight of the housing market, where there just aren’t a lot of homes available — fewer new mortgages means fewer profits.”
Additionally, Bank of America’s losses have “been shielded by expense cutting rather than from any significant growth in revenues or profits,” Schrage says. “Also, BAC stock isn’t free from the fallout from international business dealings, namely threatened tariffs on China.”
The bottom line on BAC stock. Going forward, BAC will probably follow the same path of other banking stocks, since a lot of the problems it faces are rampant throughout the industry, Schrage says. “Why the effect is being felt by Bank of America more than others isn’t easily answered, other than the expense-cutting measures,” he says.
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