Bank Of America: You Ain't Seen Nothing Yet

| About: Bank of (BAC)

Summary

Bank of America’s stock is up over 72% over the past 52 weeks.

Nevertheless, the stock has been stuck in neutral for the past five months. This has led many to believe the stock’s tremendous run may be over. I beg to differ.

In the following piece we divulge the reasoning behind our take that the run has only just begun for concerned current and prospective shareholders.

What happened?

Bank of America (NYSE: BAC) is up 72% over the past 52 weeks, yet has gone nowhere over the past five months. Nevertheless, we submit the stock has been under accumulation and is on the cusp of a major breakout.

Current Chart

Source: finviz.com

I see this as healthy for the stock after the tremendous post-election run. The big money center banks stand to gain the most from President Trump’s pro-growth policies in my eyes. Furthermore, the immediate catalyst for the stock was the release of the 2017 qualitative CCAR results which opened up the opportunity for the bank to return much more capital to shareholders over the coming years.

2017 CCAR results

Bank of America passed the both the quantitative and qualitative CCAR reviews announced recently. Based on the results, I posit Bank of America is one of the best positioned banks to begin returning much more capital to shareholders over the coming years. The tremendous improvements to the balance sheet and solid current fundamentals will allow Bank of America to increase the dividend payout and share buyback programs substantially.

President Trump’s pro-growth plans

The above factors, coupled with President Trump's pro-growth plan to bring about major regulatory reform and tax relief for the money center banks, should be a major catalyst for the stock. I suspect new dividend growth investors to enter the fray over the coming months as they realize the tremendous total return potential that lies ahead for the stock. Furthermore, the stock is still trading at a discount to its peers and the industry.

Trading at a discount

The stock is trading at a significant discount to its peers and the industry. Bank of America's stock has substantial upside based on its normalized P/E of 16.1 versus its peers trading at 19.1. This equates to a 20% discount.

Source: scottrade.com

By a price to tangible book comparison, the stock is has even more upside. Bank of America shares are trading at 1.2 times tangible book while the industry is trading at 1.7 time tangible book. This equates to over 40% potential upside of the stock was to merely trade on par with the industry. I say at least 30% upside is in the stock over the next 12 months. This makes the stock an excellent total return opportunity in my book. On top of this, CEO Brian Moynihan’s laser focus on returning capital to shareholders is reassuring.

Moynihan’s return of capital focus

Market participants should look upon Bank of America’s recent price action as an opportunity to start a position in the stock. The primary driver of share price appreciation going forward will be the increased return of capital to shareholders in the form of share buybacks and dividend increases. As Brian Moynihan stated on the conference call:

“Through the first six months of 2017, we have more than doubled the amount of net share repurchase and dividends to shareholders compared to the first half of 2016. As a reminder, with successful CCAR results behind us, we announced plans on June 28 to deliver $17 billion in capital back to shareholders over the next 12 months through higher dividends and net share repurchases.”

I like the sound of that. I expect the stock to continue to climb substantially over the next 12 months.

The Bottom Line

The rally will be underpinned by the return of capital to shareholders primarily. What’s more, if Trump's pro-growth policies get approved, this will be a huge win for the bank that is currently not priced in. I believe the risk/reward equation still favors long trades as the stock remains undervalued compared to its peers and the industry. Nonetheless, always layer in to a full position over time to reduce risk. The market could see a significant selloff if some type of exogenous geopolitical event occurs. Those are my thoughts on the matter. I look forward to reading yours! Please use this information as a starting point for your own due diligence.

Your input is required!

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Disclosure: I am/we are long BAC.

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.

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Tagged: , , , Regional - Mid-Atlantic Banks
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