Bank of America (BAC): My Favorite Bank Stock to Buy Today

The prospect of owning value stocks is a great idea, in theory. You buy undervalued stocks and you wait for other investors to catch on to the value, so that they can also buy shares, thus driving the prices up.

It’s the waiting, though, that can be your undoing! The big question—the “$64,000 question,” which became a common query in the 1950s—is this: “How can I find value stocks that are ready to rise today?”

You’re in luck!

There’s actually a relatively easy approach to that winning investing strategy—and one that led me to my favorite bank stock to buy today. (More on that later.)

Instead of looking for undervalued stocks, you look for undervalued sectors. Then after you identify the undervalued sector, you simply choose an attractive growth stock from among the many fine companies.

That’s not actually a difficult chore. If you’re a numbers person who enjoys stock research, you’ve known for several years that energy stocks and financial stocks have been undervalued because those sectors are rife with attractive earnings growth and low price/earnings ratios (P/Es). But even if you don’t study corporate balance sheets, all of the prominent financial news media have been talking about these two sectors for many months. That’s a good source for generalized stock-investing information.

However, if you were a tad more astute, you could have simply subscribed to Cabot Undervalued Stocks Advisor, where I recommended energy and financial stocks many months in advance of the news media catching on to the trend. I’ve already cashed in on Ameriprise Financial (AMP, 19.8% total return in 3.5 months), Andeavor (ANDV, 35.5% total return in 11.3 months) and Goldman Sachs (GS, 55.8% total return in 16.3 months). But investors are still profiting from many energy and financial stocks in my current portfolios. Here’s my favorite bank stock to buy today …

Best Bank Stock to Buy Today

Bank of America (BAC – yield 1.8%) is an undervalued large-cap growth stock. New appointments at the Federal Reserve (including new Chairman Jerome Powell) and the Office of the Comptroller of Currency (OCC) solidify the likelihood of banking deregulation in the coming years, which directly benefits bank profitability. While “deregulation” sounds suspiciously like “removing rules that control banks,” in today’s context, it mostly means “removing layers upon layers of duplicate government reporting that costs banks a fortune.”

The less money a bank spends on attorneys and staff to fill out duplicate government reports and their associated duplicate fees, the more money they get to keep for pro-business activities such as new hires and new services. Those pro-business activities in turn generate higher profits, and increased U.S. government income tax revenue from both corporations and new employees. See how beautifully that works?

Goldman Sachs (GS) is expected to be the biggest beneficiary of deregulation among large-cap stocks, with an ensuing 10% earnings per share (EPS) boost, according to a 116-page November report from a well-known investment bank. Therefore, I think it’s fair to conservatively estimate a 5% EPS boost from deregulation to Bank of America’s bottom line.

Bank of America also stands to receive another 10% earnings boost if corporate income tax rates are lowered to 20%, despite the potential removal of home mortgage interest deductibility. (I got that 10% figure from the aforementioned investment bank’s industry analysis.)

Let me help make those concepts real in dollars and cents. Bank of America is expected to earn $1.83 and $2.17 per share in 2017 and 2018. Those consensus estimates have risen by only three cents and two cents, respectively, since early October, which means analysts have not yet factored in the favorable appointment at the Fed nor potential changes in income tax structure.

Now let’s add a 5% EPS boost from deregulation and a 10% EPS boost from lower income tax rates to Bank of America’s consensus earnings estimates. In that scenario, Bank of America’s expected $2.17 EPS in 2018 increases to $2.50. Whereas the bank is currently expected to see EPS grow 18.6% in 2018—an outstanding year of profit growth—a revised EPS number of $2.50 would represent 36.6% year-over-year profit growth. Raise your hand if you doubt that 36% profit growth will affect the share price! It would be silly to think that a huge increase in profits won’t push the share price upward.

Need more ammo to fuel your investment decision? The current 2018 price/earnings ratio (P/E) for BAC is 12.3. Not exactly astronomical. You know what it drops to if the consensus EPS estimate is revised to $2.50? The 2018 P/E would then be 10.7. I smell a bargain!

If you’re not a numbers person, and your eyes just glazed over, what I’m telling you is that BAC is likely to bring you more capital gains than most large-cap bank stocks in the coming year. You have not missed your chance to buy BAC at a good price and benefit from deregulation and lower income tax rates.

There’s a nice dividend yield on the stock, too. Like many large-cap banks, Bank of America typically raises its dividend annually in July, right after the Federal Reserve reports which banks pass its annual stress test. The company increased its quarterly dividend by 50% in 2016, from $0.05 to $0.075 per share. It then increased the quarterly dividend by 60% in 2017, to $0.12 per share.

Buy BAC Stock Now

If Bank of America raises its dividend by 50% in July 2018, that will put the quarterly dividend at $0.18 per share, resulting in a yield of about 2.7% for investors who are lucky enough to own the stock at the current price.

BAC is an excellent choice for any value stock or growth stock portfolio. It’s my favorite bank stock to buy today. Buy BAC now in order to capitalize on its continued successes. Strong Buy.

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Bank of America (BAC): Odds favor higher prices over time

By Timothy Lutts, Chief Analyst, Cabot Stock of the Month
From Cabot Wealth Advisory 3/30/14 Sign up for Cabot Wealth Advisory—it’s free!

We all know Bank of America (BAC), and we all know basically what it does. It lends money, with the belief that more will return. Usually, it does.

Furthermore, Bank of America is really big, with $102 billion in revenues last year and a market capitalization of $180 billion.

Also, the company and the stock are extraordinarily well followed. Every day, you can read new well-informed opinions on both the company and the stock.

Which means, to me, that there’s no value to be gained by immersing yourself in the minutia of the bank’s fundamentals. When everyone knows something, knowing it gives you no advantage.

The way you get an advantage, of course, is by studying the chart. So let’s take a look, starting with the very long-term chart.

My chart starts in 1971, and the first major feature of the chart is a crash in 1974, which followed the 1973 Oil Crisis, the devaluation of the dollar and the 1973-1974 Bear Market that took the Dow down 45%.

BAC lost about 80%.

From 1974 to 2008, BAC’s main trend was up, though there was a very steep correction in 1991 (down 70%) and a very long and deep correction from 1999 through 2001 (down 55%).

But the 2008-2009 Bear Market—you remember it well—was a doozy, sending BAC down some 95%, as Lehman Brothers went under and fears of other bank failures depressed the entire sector. It didn’t help that Bank of America had acquired Countrywide Financial months before the housing sector topped out.

The rebound from that low was followed by the big correction of 2011, as the company laid off roughly 36,000 employees. That took the stock down 75%.

It recovered, of course, and since that 2011 low, BAC is up 240%—but still far below its highs of 2008.

So what comes next?

There are several ways to look at it, depending on your perspective.

The long-term perspective says that BAC’s Relative Performance (RP) line peaked way back in 1973. Overall, it’s lagged the market since.

The intermediate-term picture is actually worse; it shows us that BAC has been a serious underperformer since 2003, even considering the recent rebound.

Lastly, the short-term picture shows BAC slightly outperforming the market, as people grow increasingly comfortable investing with the bank again. This year, it’s up about 10%, and all things considered, I believe this trend will continue.

So should you own it?

Well, it yields only 1.2%, so you wouldn’t own it for the dividends.

And if you’re after capital appreciation, you can certainly do better in less popular stocks. One of BAC’s main attractions to institutions is its exceptional liquidity, and you don’t need that.

Also, none of our Cabot advisories recommends the stock. It fits none of our proven investing systems.

Nevertheless, if you’re looking for a stock where the odds favor higher prices over time, BAC gets my approval. The major trends that govern its business are positive and they will probably run longer than most people expect.

Just don’t be left holding the bag in the next big downturn.

In fact, if you really want a safe investment for your retirement, I recommend that you take a look instead at Cabot Dividend Investor, which can help you build a diversified portfolio of low-risk holdings that will bring you steady income, far more than you’ll get from Bank of America. And with a diversified portfolio, you won’t get killed like BAC shareholders in the next financial crisis. We’re opening our doors to new members on April 18; just let us know where to send the invitation to join if you’re interesting in taking a free-trial subscription. Get more details here.

Company Details

Bank of America Corporation (BAC)
Bank of America Corporate Center
100 North Tryon Street
Charlotte, North Carolina 28255
Index Membership: N/A
Sector: Financial
Industry: Money Center Banks
Full Time Employees: 242,000
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