The markets have been trending down over the past few days. As a result, some well-positioned stocks are also trending down. One of these stocks is Bank of America (NYSE:BAC), and it is down over 5% during the last five days. The stock may go down further if the much awaited correction is coming, and if that happens, a number of well-positioned stocks will lose value and offer the opportunity to investors to initiate positions. However, if the correction does not happen, this might be the best time to buy Bank of America. As my regular readers know, I'm bullish about the banking sector in general and Bank of America in particular. I believe the ingredients are there for the bank and it will certainly be trading much higher than the current levels in over a year, and even if the correction happens, the fall in the stock price will be temporary.
The most important factor for the banking sector is the economic recovery - the financial system is the engine of the economy and both these elements cannot work without each other. For the banks to continue growth, economic recovery has to continue and vice versa. The economic recovery has been quite strong since June 2009, and the global economy as well as the U.S. economy has come a long way. The image below shows the growth in real GDP since the recession.
The current level of GDP is 9% higher than 2009 levels - the recovery in the GDP has been slower than the post war recoveries when the average growth was around 17%. It shows that there are still some concerns about the global economy as Europe still continues to struggle to some extent. However, it also indicates that there is still more room for the economic recovery to continue.
The following images show business spending in software and equipment as well as industrial production and manufacturing. The pictures were taken from the Wall Street Journal.
The point 0 in these pictures represents the start of the recovery after the recession and the performance has been gauged over the next four years. The pictures above show that the business investment in equipment and software has been strong. However, the growth is well below the levels after the 1975 recession. At the same time, the growth in investment has been far stronger than the years after the recession of 2001. The trend is almost identical in industrial production and manufacturing as the recovery has been weaker than the years after 1975 and stronger than the years after 2001.
The following image shows the comparative performance of S&P 500 index after the recession. This image was also taken from the Wall Street Journal.
The performance of S&P 500 has been better than the years after the recession of 1982 and 1970 - this fact further strengthens the belief that a correction might be just around the corner as the growth in the index has been far greater than the economic growth over the last four years.
The International Monetary Fund is expecting global economic growth to gather momentum over the next few months, and the fund expects the U.S. economy to lead the way. The more important piece of information is that the fund is expecting southern eurozone economies to finally turn the corner. If the economic recovery gathers pace in Europe, it will have a hugely positive impact on global trade and other emerging economies. The IMF is expecting the U.S economy to grow by 2.8% this year, compared to 1.9% during the last year. If the predictions by IMF come to fruition, the banking sector will grow substantially.
Moving onto the fundamentals of the business - Bank of America has shown strong growth in fundamentals over the last four years. The net income of the bank has gone from $1.4 billion at the end of 2010 to over $11 billion by the end of 2013. The litigation charges and settlements have been the biggest drag on the net income of the bank over the last four years, and the growth in the business segment has been strong. The EPS has gone from $0.01 in 2010 to $0.90 by the end of last year. Furthermore, the average annual growth in cash flows over the last three years has been about 15%. A more detailed analysis of the profitability of the bank can be read in my previous article. However, earnings for the first quarter of the current year will disappoint due to the settlement with FHFA. Nonetheless, the economic environment is in favor of the banking sector and Bank of America has shown that it is well-positioned to exploit the growth opportunity.
Furthermore, the bank's valuation is still behind its peers due to the threat of litigation hanging over its head. As I have mentioned in my previous articles, litigation issues remain the only major threat to the bank and the market is still putting a substantial discount on the Bank of America stock due to this risk. Bank of America has been successful in getting rid of another lawsuit brought by QBE insurance for $228 million. I have been in favor of quick settlements as the lawsuits continue to weigh on the stock price. The litigation issues are not completely over. However, with these two settlements in the short space of time, the bank is two steps closer to putting its litigation issues behind it.
Bank of America remains a compelling long-term investment. However, if the correction happens over the next few weeks, it might not be a good time to buy. As the graph above shows the S&P 500 has grown at a much higher rate than the economic recovery; a correction is unavoidable. Investors looking for a better entry point might get the chance over the next few days. Nonetheless, the long-term trend in the stock price will be upwards as the fundamentals of the business as well as the economy are in favor of the bank.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.