Peaking in mid-March just under $10, Bank of America (NYSE:BAC) has lost some ground. Like many stocks, it began rallying toward the end of May and is currently just over $8. There is a lot to like with this stock, but not as much as many of its rivals. With a target price of only about $9, this stock does not look like it will be bringing large returns anytime in the future. The whole banking industry is in a similar predicament but like many things since the financial crisis, Bank of America is following the industry, not leading.
As such a massively large bank, Bank of America is very vulnerable to market trends and there are many things to shake up the banking industry at the moment. However, even with the constant threat of a European crisis and less than spectacular growth or employment in the United States, U.S. banks seem to be holding their ground. With these shocks in mind, Bank of America has stepped up lending to the commodities industry, recently becoming the largest lender with a total of almost $14.75 billion lent. This is certainly not a bad bet to make, but one should not confuse large with good.
That is a general caution. Just because Bank of America is not as good of an investment as its peer does not mean it does not know how to bring in cash. Expect these loans to generate huge revenues. At the same time, realize that the other two largest commodities lenders are JPMorgan Chase (NYSE:JPM) and Citigroup (NYSE:C), two large investment banks that rank near the bottom on best risk-adjusted return for banks.
In fact, Bank of America CEO Bruce Thompson seems to agree with much of this. He recently stated that capital markets and investment banking have been slow due to the poor economic situation throughout the world. While this news would not catch anybody off guard it would personally make me cautious about the stock. What often happens during this type of economic situation is bad lending and investments by banks, something JPMorgan just demonstrated.
But as I said, there are some things to like about this stock. Regarding the macro economy, Bank of America gained today based on the intention of the Federal Reserve to openly discuss ways to boost economic growth. In fact, the stock jumped about 4.5% which is certainly not insignificant. If the economy finally picks up, Bank of America could easily become more than just another banking stock. One has to imagine that is why Warren Buffett owns so much stock in the company.
Among the top of the financial stocks is U.S. Bancorp (NYSE:USB). U.S. Bancorp has begun investing heavily in commercial and residential solar panels and is leading the industry in this market. Investing in solar panels is viewed as a safe bet, as those who purchase solar panels typically have a higher amount of disposable income. U.S. Bancorp is looking to increase its investment to $440 million overall. Unfortunately for U.S. Bancorp it is still part of the financial industry and heavily reliant on the economy. With the economy continuing to churn along at a sluggish pace, many analysts have downgraded the stock to 'neutral'.
Wells Fargo (NYSE:WFC) is also among the highest financial stocks. Just last week, news broke of the company's goal to control 40% of U.S. home lending. At face value this number sounds extremely high, but currently it controls 34%, so an extra 6% increase is not hard to imagine. With the housing market beginning to stable and the default rate dropping, Wells Fargo's revenue is beginning to look very strong and robust again. With 40% of the market, the company's financials will only get better.
But U.S. Bancorp and Wells Fargo have less in common with Bank of America than you would think. A more apt comparison would be to JPMorgan Chase or Citigroup.
JPMorgan is still reeling from the over $2 billion trading loss it announced in May. Prior to the announcement its stock was around $46, but now currently hovers between $36 and $37. There has been much discussion about how the traders at JPMorgan did not fully understand the financial tools they were using or the market they were operating in, and this is beginning to seem accurate.
Citigroup has a few major losses of its own to deal with. It appears that this quarter its book value might lose between $3 and $5 billion due to the decline in exchange rates with the United States dollar. Since Citigroup does an extensive amount of business in developing countries, it is more vulnerable than a more national bank such as Bank of America. This certainly has the potential to bring large returns if these countries start growing faster, but it is a risky bet to make at this instant.
Bank of America is somewhere between JPMorgan and Wells Fargo in terms of attractiveness for investment. It does not have much to set it apart from the competition, but it is in the process of divesting in assets, hopefully with the result of being a more focused firm. I don't see investors reaping huge returns off this stock anytime soon, and if the economy picks up, there will be better stocks in the industry. However, at around $8, it is a cheap buy that has potential.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.