Bank Of America: Stick With This Bank In 2020

Summary

• Bank of America's stock outperformed the broader market by a wide margin in 2019.
• The investment community is concerned about how the interest rate environment will negatively impact the banks in 2020 but, in my opinion, the concern is overblown.
• I plan to stay overweight Bank of America through at least 2020.
• This idea was discussed in more depth with members of my private investing community, Going Long With W.G.. Get started today »

Bank of America's (NYSE:BAC) stock performed well in 2019, as BAC shares finished the year higher by over 40%. In addition, BofA's stock outperformed the broader market by over 14 percentage points.

Data by YCharts

The stock performance over the last year was impressive but, in my opinion, BAC shares still have a lot of room to run. To this point, I believe that investors should consider staying the course with BofA because I believe that the risk is currently to the upside, if you are willing (and able) to look out 3-5 years.

The Latest, Strong Results In A "Challenging Environment"

BofA recently reported Q3 2019 financial results that beat the top- and bottom-line estimates. The bank reported Q3 2019 adjusted EPS of $0.75 (beat by $0.07) on revenue of $22.8B (beat by $70M), which also compares favorably to the year-ago quarter.

Source: Q3 2019 Earnings Slides

There was a lot to like about BofA's Q3 2019 results, as I recently described here. There is no denying that BofA has continued to report strong operating results over the last 12 months but when it comes to an investment in this bank the two concerns that I hear the most are: (1) there is no need to hold onto BAC shares in the current rate environment, and (2) the valuation is stretched.

I believe that both concerns are overblown.

Rates Matter But There Is More To The Story

Some pundits cannot seem to get past the idea that the current interest rate environment will negatively impact the banks, but let's not overlook the other catalysts that BofA has in place. To start, an improving regulatory environment has been viewed as a positive development for the banks, as some of the burdensome rules and regulations have been rolled back over the last few years. And let's remember that most companies, including the banks, benefited from the tax law changes that our President pushed through for 2018.

Additionally, while the Fed lowered rates several times in 2019, there is an increasing probability that the banks will be positively impacted by a steepening yield curve over the next 12-18 months.

And most importantly, while the U.S. economy is expected to slow down over the next 12 months, pundits are still predicting for GDP growth to be close to the 2% range for 2020.

Source: Deloitte Insights

Deloitte's thoughts on the base case (55% probability):

Uncertainty from the trade war with China dampens investment spending. Employment and consumer spending are slow but remain relatively strong. Employment growth stays above the replacement level for another year or two but eventually slows to below 100,000 per month as the stock of potential workers is exhausted. While government spending does not fall, it no longer contributes to accelerating growth. Growth slows below potential in 2020 but picks up to potential (a bit below 2.0 percent) for the remainder of the forecast.

Strong employment and strong consumer spending, what's not to like? And to this point, Mr. Brian Moynihan, CEO, recently spoke at great lengths about how consumer spending is fueling the strong economy, which obviously bodes well for BofA. I believe that the bank's other businesses will help it maintain while the story continues to play out.

Moreover, I do not know why people are downplaying BofA's business prospects when it comes to the digital space because, in my opinion, the digital push will be a material component of the investment thesis for BofA (and the other large financial institutions). And it is important to note that the pieces are already starting to fall into place:

Source: Q3 2019 Earnings Slides

Digital is about more than just cutting costs, as this bank is making great strides incorporating digital into almost everything that they do. But remember, while BofA is a trend setter, the bank is not alone in the space. For example, a well-known banking analyst, Wells Fargo's Mike Mayo, recently said that the 2020's will be "decade of technology for banks". Mr. Mayo believes that the banks - specifically BofA, Citigroup (C) and JPMorgan (JPM) - are great long-term buys today, even after the strong finish to 2019.

At the end of the day, the current interest rate environment is not ideal but let's not forget that there is more to the BofA story than just its net interest margin, or NIM.

Valuation

BofA is less attractive at $35 per share than it was at this point in time last year. However, the bank's stock is not close to being overvalued, especially in today's market.

Source: multpl.com

Data by YCharts

The stock is still trading in an attractive range based on the bank's historical metrics. Plus, BofA's stock is attractively valued based on two key metrics when compared to its peers.

Data by YCharts

I do not believe that BofA's stock is overvalued (or stretched) by any means. Instead, I think that BAC shares should continue to close the gap with the best-in-breed bank, JPMorgan, in the quarters/years ahead.

Risks

Regulatory concerns always need to be factored in when evaluating large financial institutions, and this includes Bank of America. I believe that the regulatory environment is actually improving, but this could change in short order.

The Federal Reserve and rates are a "concern" right now, but investors need to also consider the macro environment. A deteriorating economy would eventually negatively impact the banking sector. Currently, there are some headwinds, but, in my opinion, a recession is not in the cards in the near future.

Bottom Line

Do not let the current interest rate environment scare you out of an investment in Bank of America. This bank continues to perform well in any environment and, in my opinion, Mr. Moynihan has it well-positioned for 2020 and beyond.

I believe that BofA's stock will be a market-beater over the next 18-24 months, so investors with a time horizon longer than the next few quarters should treat any significant pullbacks, especially if they are caused by broader market concerns, as long-term buying opportunities.

Disclaimer: This article is not a recommendation to buy or sell any stock mentioned. These are only my personal opinions. Every investor must do his/her own due diligence before making any investment decision.

Disclosure: I am/we are long BAC, C. 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.