Bank of America’s (NYSE:BAC) investor position indicator recently fell below 2.0 for the first time since January. As a result, BofA market strategist Michael Hartnett hinted that investors should consider buying risk assets such as BAC stock.
Bank of America (BAC) Stock Has Positive and Negative Catalysts
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Before you get mad at me for stretching the truth, here’s what Hartnett actually said:
“The bank’s investor position indicator, which tracks 18 measurements on asset flow, sentiment, and price, is falling below 2.0 for the first time since January—a level that signals that investor positions are extremely bearish and triggers a contrarian buy signal for risk assets.”
He did not recommend buying BAC stock.
However, trading at 1.o5 times its book value, the BAC stock price certainly is attractive relative to some of its peers.
Is that enough to make BAC stock a buy?
Here are my arguments for and against buying Bank of America stock.
The Argument for Buying BAC Stock
As I stated above, Bank of America’s price/book ratio is pretty darn low.
According to a list of the 15 largest U.S. banks by total assets, the average P/B of the 14 banks not named Bank of America is 1.24, approximately 18% higher than BAC. So, on that front, BAC stock is cheaper than its peers.
However, there are some outliers. For example, Charles Schwab (NYSE:SCHW) is the 12th-largest U.S. bank with $283 billion in assets. It has a P/B of 2.68 due to its wealth management and brokerage businesses. Excluding Schwab, the average P/B drops to 1.13, 7.5% higher than BAC.
More importantly, compared to the largest U.S. bank, JPMorgan (NYSE:JPM), which trades at 1.53 times book, BAC stock provides better value.
It also can’t hurt to mention that BAC stock is Berkshire Hathaway’s (NYSE:BRK.A, NYSE:BRK.B) largest bank holding. Berkshire owns $26.0 billion of BAC stock, representing 12.5% of the holding company’s equity portfolio.
If you believe in Warren Buffett, that speaks volumes about BAC.
The Argument Against Buying Bank of America Stock
Between the trade war, which is hurting a wide swath of U.S. companies and the recent interest-rate cut which lowered the amount banks make from their loans, banking stocks are cheap for a reason.
And although Federal Reserve Chairman Jay Powell has said further interest rate cuts are unlikely, if the trade war continues well into 2020, the Fed will definitely reconsider its stance.
Quite simply, banks’ earnings are currently under pressure and will remain so for the foreseeable future. That makes all bank stocks less attractive.
Interestingly, despite the fact that all bank stocks are being hurt by the current economic climate, BAC was the only major bank stock to be downgraded by Raymond James analyst Michael Rose last week. Rose cut Bank of America stock from “outperform” to “market perform,” due to the bank’s inability to generate positive operating leverage in 2020.
InvestorPlace writer James Brumley recently referenced Rose’s comments about BAC in his article about the bank.
“We now see its greater than peer asset sensitivity positing a greater challenge to net interest income given further flattening of the yield curve and the potential for several additional rate cuts from here,” Rose stated.
Brumley further noted that the bank has an unusually large amount of non-interest-bearing deposits that help it during periods of rising interest rates but hurt it when interest rates are falling. BAC ‘s non-interest-bearing deposits account for 23% of its total funding sources.
BAC stock has risen more than most of its peers as a result of the possibility of higher interest rates. However, now that this has been thrown into question, Bank of America stock doesn’t have nearly the momentum it did a year ago.
The Bottom Line on BAC Stock
I would wait until the trade war is settled and the direction of the U.S. economy is better understood before buying BAC stock.For those who don’t want to wait, I see JPMorgan as the best of the major U.S. banks
At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
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