The Worst May Now Be Over for Bank of America Stock

Stocks to buy

With economic slowdown, slashed interest rates and other headwinds top of mind, is Bank of America (NYSE:BAC) a buy at today’s prices? Perhaps. The coronavirus from China is no doubt going to affect the bank’s near-term results. But, with BAC stock dropping nearly 40% since late February, much of this may already be priced into shares.

Bank of America stock

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Yet, buying the dip seems risky in today’s market — even if experts are starting to call a bottom. There’s a lot more that could go wrong if social distancing continues.

Many of the businesses on lockdown are highly levered. But the specter of government intervention could mean Bank of America can weather the current storm.

In short, now could be a buying opportunity for BAC stock. Risks remain, but shares could easily pop 20%-plus from their current price level.

Is It 2008 Redux for BAC Stock?

The recent market turmoil has many having throwback Thursday flashbacks to the 2008 financial crisis. While the factors driving this downturn are different, it’s hard not to make comparisons. But unlike in the last crisis, the big banks are better capitalized.

Or are they? Bank of America CEO Brian Moynihan and other big bank heads may have recently expressed confidence in their respective capitalization. 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.

However, government intervention is on the horizon. In short, a bailout could prevent acceleration of Bank of America’s troubles. This may help support BAC stock, and prevent further downside from today’s price levels.

But this time, populist backlash could mean more strings attached. It’s up in the air whether big banks will be able to continue business as usual.

Big Upside Is Questionable for Bank of America

Is BAC stock the best play for a stock market bottom? Compared to other opportunities, maybe not. As InvestorPlace’s Vince Martin discussed March 10, there are other sectors that could be better options. Examples he gave included airline, casino and retail stocks. These industries may be the most hammered by social distancing. Yet, if things turn out less bleak than anticipated, their respective shares could skyrocket.

On the other hand, even with a darkest before the dawn scenario, Bank of America stock could remain stuck at current prices. Especially with the Federal Reserve’s interest rate policy impacting the company’s bottom line.

Another negative factor is anticipated cuts in buybacks. Prior to the outbreak, buybacks and dividends helped move the needle for BAC stock. But now, with buybacks on hold, this catalyst is off the table. Yet, canceling buybacks could ensure banks stay well-capitalized. It could also allow banks to avoid a dividend cut.

Do both these factors mean, at best, BAC stock treads water? It depends.

I agree with Martin’s assessment, that other sectors offer greater upside potential. I also believe a long-term pause on buybacks is bad for earnings per share growth. Yet, government intervention, coupled with social distancing ending quicker than anticipated, could mean shares rebound. If not to past highs (above $35 per share), at least back to around the $25-$30 price level. The question is, can shares move beyond this price target?

Look to BAC Stock as a Short-Term Play

With shares trading at around 80% of book value, Bank of America stock looks cheap at today’s prices. Yet, banks like Citigroup (NYSE:C) and Wells Fargo (NYSE:WFC) are also selling at discounts to book. Based on their forward price-earnings ratio of 6.8, shares also look more like a great value play. But this forward earnings estimate does not factor in likely declines in profitability this year.

However, with this low valuation comes a pricing-in of the bank’s grab-bag of risks. Investors may be having flashbacks to 2008, but with strong capitalization, and the specter of another bailout, perhaps things won’t be as bleak for the big bank stocks.

So, what’s the verdict? A short-term rebound may be in the cards. Shares could boost back in the near term. Yet, long term, it’s hard to see shares move beyond that price level.

If backlash over buybacks continues, BAC stock could lose one of its silver bullets to move the needle. With this in mind, consider shares a strong short-term play, but acknowledge they could tread water in the long term.

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.

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