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It's my opinion that Bank of America's (BAC 0.59% ) stock could soon be a buy if the events in Washington, D.C., continue to roil the markets. I'll spell out exactly how I intend to approach this after laying out my thesis.
They rocketed because investors believed that a pro-business president would be good for the economy, which would boost loan demand and interest rates. This would position banks to sell more of their primary product, and do so at a higher price.
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On the campaign trail, moreover, the current president vowed to dismantle the Dodd-Frank Act of 2010, which had been passed to combat the conduct that led to the financial crisis. The regulations passed under Dodd-Frank have become incredibly burdensome to any objective observer.
When a banker with pristine credentials such as Robert Wilmers at M&T Bank spends the lion's share of his widely read annual letter every year talking about the undue compliance burden facing banks, and is seconded by the likes of U.S. Bancorp's Richard Davis and JPMorgan Chase's Jamie Dimon, the fact is that the regulatory environment has gotten too onerous.
But the market went too far. Valuations got too far out in front of fundamental performances. This is why I wrote in February that cash will be king in 2017, as it wouldn't be a surprise to see valuations correct sometime this year after the messy realities of governing sunk in.
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Some people will see this as market timing, the implication being that it's impossible to time the market. But one should never get dogmatic in their thinking.
The reality is that stocks, measured by the leading stock market valuation measure today, Robert Shiller's CAPE ratio, have only been higher twice in history: In 1929 and 1999.
One reason stocks are historically high is that interest rates are historically low -- Warren Buffett makes this point. And interest rates and stocks are inversely correlated. As rates go up, so too will the required rate of return on stocks in order to compete on a risk-adjusted basis with risk-free alternatives such as government bonds.
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But interest rates were priced into stocks before the election. What happened after the election, with bank stocks rallying 20% or more, was all about expectations around Donald Trump's ability to deliver on his promise to lower taxes, ease regulations, and boost economic growth.
That wasn't a bad bet, given the Republican unity between the executive and legislative branches. Fast-forward to today, however, and the governing agenda has taken a back seat to the controversies swirling around the president.
It seems increasingly unlikely, if not fanciful, to think that any type of meaningful tax reform can be accomplished at this point. Republican Sen. Mitch McConnell went on the record this week to say that tax reform must be revenue neutral, which effectively eliminates the simulative impact from the proposed reform and will temper any cuts to the corporate income-tax rate.
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The same goes for the other legislative priorities the administration had laid out. Things like repealing Obamacare, building a wall, investing $1 trillion in domestic infrastructure, and so on.
The net result is that expectations are being recast. As that happens, it would make logical sense that stock valuations will follow. And as that happens, it's my opinion that there will be attractive investments to be made.
The nation's second biggest bank by assets is no longer weighed down by legal actions and toxic assets tracing back to the financial crisis. As a result, while Bank of America has spent $200 billion over the past eight years on crisis-related costs, it's now free to grow revenue and earnings consistently.
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And growing earnings is exactly what it's doing. Last year was the second best year in Bank of America's history, in terms of the size of its bottom line. By the end of this year, moreover, Bank of America could be on track to meet its profitability targets on an annualized basis.
On top of that, Bank of America has an abundance of excess capital on its balance sheet. I estimate that it could return as much as $23 billion to shareholders by way of buybacks, yet still be considered well capitalized and sail through the quantitative portion of the annual stress tests.
And the bank's chairman and CEO, Brian Moynihan, has repeatedly said that buying back a lot of stock is one of his top priorities. He did so most recently in his 2016 shareholder letter.
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Eventually, it will be freed up to do just that. And it'll probably be sooner rather than later. By next year, Bank of America could have a combined payout ratio of more than 100%, meaning that it pays out more in dividends and buybacks than it earns in net income.
This would drive down the capital on its balance sheet, and thereby drive up its profitability. And because profitability and valuation are intimately intertwined, it would boost Bank of America's valuation, a move that would be catalyzed by the bank's falling share count.
It would also increase the buying pressure on Bank of America's stock. This would come from both the bank's repurchase program, as well as from income investors that move back into its stock for the growing dividend.
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Consequently, the threshold I'm looking for is around $20 a share. If Bank of America's stock breaks below that, I'll start buying it. I'll do so in multiple stages, which will allow me to average around the bottom.
John Maxfield owns shares of Bank of America and US Bancorp. The Motley has no position in any of the stocks mentioned. The Motley has a disclosure policy.
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Has The Stock Market Hit Bottom Yet? Bank Of America Says 6 Of 10 Signs Point To No
Bank of America (BAC 0.59% ) is one of the largest banks in the world, and the Charlotte-based banking giant has a long and illustrious history that dates back more than 200 years through its heritage banks. Yet even in such a long time period, the financial crisis in 2008 still marks the most critical time for Bank of America, and its entire stock history hinges on that key moment.
Investors have enjoyed a nice bounce over the past eight years, but they still want to know if Bank of America stock can regain all of its losses and start making forward progress like many of its banking peers. Recent efforts have promoted growth, but there's plenty of disagreement about whether there's an upper limit to Bank of America's success that could stifle further gains.
Over the past half century, Bank of America has gone through a couple of key periods of growth. The first came during the 1990s, when a period of economic prosperity pulled the entire U.S. economy upward. For its part, Bank of America took advantage of the opportunity to bounce back from tough times in the late 1980s, when the bank made substantial loans to emerging markets that went sour, especially in Latin America. The financial giant used acquisitions to bolster its size, including the purchases of California-based Security Pacific and Chicago's Continental Illinois National Bank and Trust.
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Bank of America sought to be the largest bank in the country, but it faced difficulty in keeping up with North Carolina-based NationsBank . In 1998, NationsBank bought Bank of America, but after the merger, the bank kept the B of A name, and the share-price history above reflects the historical legacy of NationsBank as the legal entity that survived the merger. After the merger, the stock took a pause and gave up ground as investors looked toward the tech industry for outpaced gains, and the initial bear-market move in 2000 took B of A to its lows.
Yet from there, Bank of America bounced back. The company took full advantage of the housing boom, and the stock price doubled between 2001 and 2007 as profits soared. That was even more impressive given the company's high dividend yield, which also added to total returns.
The financial crisis sent the entire banking industry to the brink of disaster, and Bank of America suffered more than most. For B of A, the 2005 purchase of credit card giant MBNA proved to be an ill-timed acquisition, and the bank ended up having to write off between $20 billion and $30 billion in credit card loans each year from 2008 to 2010.
Bac Stock Price And Chart — Nyse:bac — Tradingview
Adding further pressure was the 2008 purchase of Countrywide Financial. The move
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