Stock of the Week

Bank of America

August 14th 2020

Bank of America
NYSE Symbol: BAC
Industry: Banking
Price as of 8/10: $26.56

The major averages continue to perform well during this pandemic. The Nasdaq has been the standout surging to new all-time highs up 23% year to date. The S&P 500 moved into positive territory last month up 5% year to date. The Dow Jones Industrial Average is down only 2% for the year. Tech stocks have done the heavy lifting in the major averages as the sector is up 25% for the year. Most sectors and stocks remain in the red for the year but last Friday, and this week, we have seen some rotation out of techs into other stocks including the financials. This week we will highlight the nation's second-largest bank with insider buying over the last month. The stock of the week is Bank of America.

Over the last month, through Berkshire Hathaway, legendary investor Warren Buffett has bought over $2 billion worth of Bank of America stock. Berkshire Hathaway now owns 11% of Bank of America, getting special permission from the Federal Reserve to buy over 10% of the bank as long as they don't take active control of the bank, don't plan to merge with the bank, sell its assets, or make significant changes to Bank of America's strategy or leadership.

The fundamentals in the short term will remain tough for Bank of America and other banks as bad loans remain a problem. In the second quarter, Bank of America reported a sales decline of just 3%, but the company did set aside $5.1 billion for expected loan losses, six times more than during the same period last year. The $5.1 billion is on top of the $4.8 billion set aside in the first quarter. The third quarter won't be much better, but Bank of America is managing their expenses well and building up their liquidity to satisfy the Federal Reserves' stress test while also maintaining their dividend.  

For longer term investors the fundamentals should slowly improve over the next year. Bank of America trades for 12 times next year's estimates, just 2 times sales and less than one times book value of $27.96 a share. Their strong balance sheet will allow the bank to maintain their dividend of 2.8%. Bank of America also has one of the lowest payout ratios among the big banks, giving them room to boost their dividend when the fundamentals improve, and the coronavirus subsides. Warren Buffett and Berkshire are looking long term owning over a billion shares of Bank of America, their second largest position to Apple which is up 50% for the year. Bank of America probably doesn't have 50% upside, but the stock has good capital appreciation potential with a nearly 3% dividend which investors can enjoy while they wait for the economy and the banking fundamentals to improve.