Should You Buy Bank of America While It's Below $45?
Shares of Bank of America (NYSE: BAC) have cruised higher this year, momentum that has continued from late 2023 on the backs of strong corporate results. But the company has yet to return to its previous highs.
Should investors buy this top bank stock while it currently trades below $45 per share? Let's look at the positive and negative traits of Bank of America before deciding.
Bank of America's durability
Bank of America's history goes back to 1904, when A.P. Giannini founded the Bank of Italy in San Francisco. The company has proven to be durable, standing the test of time. And this is in the face of technological changes that have altered the industry.
The Lindy Effect states that the longer something has existed, the longer its life expectancy from this point forward. This gives me confidence to say that Bank of America is not going to be disrupted anytime soon.
Bank of America possesses a wide economic moat. I'd argue that the brand is a key asset. In this industry, trust means a lot. And the fact that Bank of America has navigated multiple turbulent periods and continued to serve its user base is telling. The business is the leader in U.S. retail deposits, a clear indication of the trust that customers have in it.
The company's massive scale, with operations in 35 countries, is another advantage. Bank of America can easily acquire and service new customers, with the ability to provide an exhaustive list of products and services tailored to their specific needs.
Another reason to buy the stock is because Warren Buffett-led Berkshire Hathaway is a huge shareholder, owning 11.4% of the massive bank. This is even after the Oracle of Omaha's conglomerate trimmed its position.
Bank of America is consistently profitable, a feature that might be taken for granted. In the past decade, its net profit margin has averaged 25%. This bottom-line performance allows the business to continuously pay dividends. For investors who like companies that provide a regular passive income stream, Bank of America may be compelling with its 2.6% yield.
Bank of America's track record
One of the top reasons not to own this stock, even though Buffett does, is due to its disappointing track record. In the past three-, five-, and 10-year periods, the stock has produced a total return that trails that of the broader S&P 500 index.
Even after this underperformance, the stock looks fully valued. It trades at a price-to-book ratio of nearly 1.2. That's not only a premium to its trailing-10-year average, but it's much higher than a multiple of 1, the point below which banks are considered undervalued.
As is the case with every financial services business, particularly those that borrow and lend, Bank of America's operations are cyclical. One might quickly assume that with the Federal Reserve ready to cut its benchmark interest rate this month, banks will see stronger demand for loans from borrowers, with the possibility that rates paid to depositors on their savings could come down.
Plus, lower interest rates are viewed as being accommodative toward the economy. They could spur GDP growth, which is good for banks.
This perspective all makes sense, but it's hard to know how much of this anticipation of a more favorable macro backdrop is already priced into the stock. Shares have climbed 54% in the past 10 months, so perhaps the market has already become overly bullish.
Bank of America's financial performance still ebbs and flows with the direction of the economic environment. And for me, that's a very unattractive characteristic.
Bank of America isn't going away, as its durability is notable. However, I don't believe the stock will outperform the S&P 500 over the long term, which mimics its past performance. Therefore, I'm not buying shares, even though they trade below $45.
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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.
Should You Buy Bank of America While It's Below $45? was originally published by The Motley Fool