Source: PaxForex Premium Analytics Portal, Fundamental Insight
In recent times, Bank of America hasn't been a stellar stock, underperforming the S&P 500 in the one-, three-, five-, and 10-year periods. The discouragement extends into 2023, with a notable 8% decline as of December 7. However, as we contemplate the future, the question arises: should investors buy, sell, or hold this sizable bank stock? Let's explore the arguments on all sides.
Starting with the case to buy and hold, there are compelling reasons for both new investors and existing shareholders. Bank of America boasts solid financial results, evident in a 3% uptick in net revenue and an impressive 11% rise in diluted earnings per share for the latest quarter ending September 30, 2023. These figures surpass Wall Street expectations, suggesting strong momentum that could positively impact the share price.
While Bank of America, as a diversified financial institution, engages in the fundamental banking activities of deposit-taking and lending, the recent fluctuations in U.S. interest rates, starting from 2022, have had a significant impact on its operations. Interestingly, the current environment is working in the bank's favor, driving up net interest income. Consequently, the net interest yield, factoring in what Bank of America pays to depositors, has expanded from 1.87% a year ago to 2.12% in the latest period.
One indicator of a robust business is the presence of an economic moat, and Bank of America's competitive position benefits from cost advantages, particularly tied to its low-cost deposit base and the reluctance of consumers, small businesses, and corporations to undergo the hassle of switching banking providers. This moat might explain Warren Buffett's significant investment, as Berkshire Hathaway holds a massive $32 billion stake in Bank of America, making it the conglomerate's second-largest holding - an endorsement worth noting.
It's crucial for investors to grasp the significant reasons to consider selling Bank of America. Given the bank's susceptibility to changes in interest rates and its cyclical nature tied to the broader economy, timing investments around economic recoveries poses challenges.
Cyclical companies, including banks, entail a level of risk not present in businesses with more stable demand. The looming possibility of a severe recession increases the risk of rising defaults for Bank of America, especially as CEO Brian Moynihan highlighted signs of slowing consumer spending during the Q3 2023 earnings call.
The complexity of banking institutions adds another layer of uncertainty. The regional banking crisis earlier in the year serves as a reminder of the risks that may not be readily apparent. Even Bank of America, considered too big to fail, faced challenges, with held-to-maturity bond holdings carrying an unrealized loss of $131 billion as of September 30. These factors contribute to the stock's disappointing performance in 2023.
Considering these concerns, the inclination is to avoid the stock, as the reasons against seem more compelling than the bullish arguments, leading to a decision to stay away.
As long as the price is above 29.00, follow the recommendations below:
- Time frame: D1
- Recommendation: long position
- Entry point: 30.72
- Take Profit 1: 32.00
- Take Profit 2: 33.00
Alternative scenario:
If the level of 29.00 is broken-down, follow the recommendations below:
- Time frame: D1
- Recommendation: short position
- Entry point: 29.00
- Take Profit 1: 28.00
- Take Profit 2: 27.00
