Is Bank of America Stock a Buy?
Bank of America (NYSE: BAC), one of the largest financial institutions in the world, has underperformed the broader S&P 500 over the past five years. That's certainly not a solid track record. However, shares have soared 60% since the start of November, and they're up 25% this year as the momentum continues.
Should investors buy this top bank stock right now? Let's dive into the bull and bear cases before making an informed decision.
Beating Wall Street estimates
Bank of America's latest financial results should give investors a reason to cheer. The business beat Wall Street expectations on the top and bottom lines.
During the three-month period that ended June 30, Bank of America reported revenue (net of interest expense) of $25.4 billion (up 1% year over year) with diluted earnings per share totaling $0.83 (down 6%). While these figures were not impressive compared to Q2 2023, the fact that they came in ahead of analyst forecasts is encouraging.
Investors will also appreciate this company's wide economic moat. Bank of America is a highly regarded brand, and thanks to its monster scale and broad reach through its branches, corporate offices, and digital foundation, the business has an advantage in raising deposits and finding borrowers.
I believe the prospect of lower interest rates could also be a boon for the company. It's anyone's guess when the Federal Reserve will start to cut interest rates, but I think it will happen. Not only will this allow Bank of America to charge lower rates on its deposits, but demand for loans from consumers and enterprises will likely also rise, leading to greater revenue potential.
Buffett's decision to sell
One of the top reasons to be bearish is Warren Buffett's recent decision to sell shares. The Oracle of Omaha's conglomerate, Berkshire Hathaway, is a large shareholder, and the fact that the position is being trimmed might be a cause for concern.
To be clear, even after making sizable sales, Bank of America still makes up a significant position, representing 10% of the Berkshire Hathaway portfolio. Some investors might still view this as a vote of confidence.
But it's worrying when an influential investor like Buffett decides to sell. It might make smaller investors more cautious about the stock.
Perhaps Buffett isn't as comfortable with Bank of America's current valuation. The stock trades at a price-to-book ratio of 1.2. Anything over 1 is generally considered fully valued or overvalued. Shares are now selling at a 56% premium to where they were about nine months ago, as well as 19% higher than the trailing 10-year average, which could be a harbinger of poorer returns.
Bank of America is a durable business, and it's unlikely to be disrupted anytime soon. However, the challenge with owning banks is that these companies are cyclical. Yes, the economy spends more time in expansion mode than in a recessionary period. But good luck to those who believe they can correctly predict changes in the economic cycle.
I don't believe Bank of America will outperform the broader S&P 500 over the next five years. In my opinion, the stock isn't a worthy investment candidate today.
Should you invest $1,000 in Bank of America right now?
Before you buy stock in Bank of America, consider this:
The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Bank of America wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.
Consider when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you’d have $683,777!*
Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than quadrupled the return of S&P 500 since 2002*.
*Stock Advisor returns as of July 29, 2024
Bank of America is an advertising partner of The Ascent, a Motley Fool company. Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Bank of America and Berkshire Hathaway. The Motley Fool has a disclosure policy.
Is Bank of America Stock a Buy? was originally published by The Motley Fool