Why Bank of America (BAC) is My Favorite Bank Stock

Bank of America (BAC) is my favorite bank stock right now, and its future looks a lot brighter. The share price could double from here.

Bank of America has underperformed for a number of years in an already-shaky banking sector, with added uncertainty regarding interest rates, economic growth, lending, income generation, and regulation. But the worst is now likely behind BofA (BAC), and investors could begin to warm up to and even chase the stock due to very attractive and deeply-discounted valuations, strong cash flows, a growing dividend, increasing earnings, peer outperformance, and an improving overall environment.

After collapsing during the financial crisis of the Great Recession (2007-2009), Bank of America (BAC) has been stagnant during the economic recovery which followed. Though the stock bottomed in early 2009 and again in late 2011, it has done almost nothing for three years since 2013.

Bank of America (BAC) has underperformed the broad Financials sector (XLF).

BAC is significantly lagging Since the 2007 peak:

BAC is significantly lagging since the the beginning of 2010, with a negative return while Financials (XLF) as a whole are up big:

Now is the time to BUY Bank of America (BAC), and here's why:

VALUATIONS
Bank of America is trading at very attractive valuations, selling at a deep discount likely due to overblown fears. 

The stock is currently trading at a Price-to-Earnings ratio (P/E) of 10 and a forward P/E of 8. Moreover, the P/E ratio has dropped considerably to a low not seen since 2012:

Furthermore, the stock is selling at nearly HALF its Book Value (P/B) and even below its Tangible Book Value (P/TB):

Most Bank stocks have been selling at discounts to Book Value or close because of all of the fear surrounding the sector. But with much of the Financial Crisis and potential hurdles behind us, buying BAC at around half of BV is a steal.


FINANCIAL STRENGTH
Bank of America is fairly solid financially and in many ways stronger now than it was before the Great Recession. 

BAC's liquidity and ability to withstand a slowdown is visible in its Cash Ratio and Quick Ratio:

BAC's Total Current Assets and Total Assets are bigger than Total Current Liabilities and Total Liabilities, and Total Deposits have been growing:

BAC also has a greater ability to cover its Debts, visible in its much lower Debt-to-Equity (Debt/Equity) and Debt-to-Assets (Debt/Assets) ratios:

Add to that a decreased Beta, which signals a decreased volatility compared with the past 5 years:

PROFITABILITY
Bank of America has improved on both its Earnings and its Margins. 

It has been able to grow its Earnings Per Share (EPS):

Margins (Profit Margin & Operating Margin) are positive and also improving:

Net Income (NI) is positive and has been on the rise:

Net Income (NI) by business segment:

CASH FLOWS

Bank of America's cash flows are pointing to a safer, more liquid, and growing company. Usually considered one of the most important determinants of a financially-strong company (or, in the opposite case, an accounting "red flag"), Cash Flow for BAC is mostly a positive factor. 

Free Cash Flow (FCF) is positive. Though it has been volatile, it still looks good:

BAC's Operating Cash Flow (CFO) is positive. Another major "red flag" in the case of negative CFO, Bank of America still has the "green light" because its CFO is positive.

BAC's Cash Flows from Operations (CFO), Investing (CFI), and Financing (CFF). Financing has turned negative, but overall Cash Flows are acceptable.

Cash Flows are important because they can indicate a company's ability and liquidity to weather a slowdown or cover its debts, as seen in BAC's Cash Flow from Operations (CFO) to Current Liabilities ratio:

DIVIDEND

Another good reason to own BAC is the Dividend that pays investors an income stream while they wait. Even better, though the current 1.51% Dividend is still low, it has been growing:

Additionally, as Banks continue to strengthen and overcome the strict regulation which has limited their ability to raise dividends, BAC's dividend might approach its historical level of closer to 4 or 5%:

INSIDER BUYING

Insiders still own only a tiny piece of BAC stock, but their support has grown, as visible in the growing number of shares owned by insiders:

PEER COMPARISON

Bank of America is also attractive when compared to its competitors, not just on an absolute basis.

When compared to companies like Citigroup (C), JP Morgan (JPM), Wells Fargo (WFC), US Bancorp (USB), American Express (AXP) and Goldman Sachs (GS), Bank of America (BAC) has a very attractive P/E Ratio, PEG Ratio, P/S Ratio, and P/B Ratio. In fact, its Price-to-Book (P/B) ratio is the lowest of its major competitors, and far below most of them.

BAC has far more Cash and Short-Term Investments ($167 Billion) than all of its competitors except for JP Morgan:

BAC has strong Revenues and competitive Net Income when compared to the other banks:

BAC has strong liquidity and Free Cash Flow compared to its peers:

BAC has room to grow its Dividend:

Even with the attractive valuations, strong financials, improving business, etc., Bank of America (BAC) has still underperformed most of the Financials Sector over the past two years:

Surprisingly though, since the March 2009 bottom the worst performers have been Goldman Sachs (GS) and Warren Buffett's Berkshire Hathaway (BRK.B):

Bank of America (BAC) is, however, the 4th largest allocation within the Financials ETF (XLF):

TECHNICALS

Bank of America (BAC) has recently seen a sharp drop from ~$18 to $11, with a break below the critical $15 level. The $15 level dates back to 2013, so rising back above it could be difficult but is necessary for the continuation of the uptrend.

On the positive side, even with the overhead resistance, the Relative Strength Indicator (RSI) is trending up and even hinted at a bottom in February with a "positive divergence" in RSI while the stock price made new lows:

Furthermore, the Weekly chart looks excellent as the 50, 200, and 300-week Moving Averages are aligned properly and shorter-term momentum is leading. This Weekly chart will look even better, way better, if BAC can climb back above the 200-week MA.


















Perhaps the rolling 52-Week-Highs and Lows could signal upcoming trend as well:

It is a bit disconcerting that the 52-Week-Low (red line) was violated and is trending down, but if BAC could break back above the $18.48, 52-Week-High (orange line), there is A LOT of upside.

REPUTATION

Bank of America is still one of the biggest and most well-known banks, with a great reputation and plenty of awards. There is plenty of room for improvement, but the brand name is a huge plus. 

Nothing is guaranteed, but think about it this way: If there is another banking or financial crisis, which bank is the US Government most likely to save solely due to its name? 

It also helps to have a leading Wealth Management brand name like Merrill Lynch:

Bank of America (BAC) has been overlooked and its stock is set up for major upside.
It is selling at steep discounts; it sports attractive valuations; it has improved its financial strength substantially; it is profitable; it is growing; it has good cash flows; it has growing insider support; it has strong peer comparisons; it pays a dividend; it has a great brand name; and it has plenty of room to exceed expectations.
Bank of America (BAC) may be the best Bank stock to invest in, and it could double, triple, or more over the next years if it can continue to improve.


Includes: BAC, XLF, JPM, C, GS, USB, BRK.B, WFC, AIG

Unemployment is Ready to Rise

Unemployment is set to increase very soon.

Although the recovery in jobs has been stronger than most realize or are willing to accept, it's about to reverse. Rising unemployment is coming (and so might a recession).

The employment situation has been better than most realize or are willing to accept. According to the unemployment numbers, we've seen slow but steady growth in jobs. The Unemployment Rate is much lower than it was in 2008 and 2009, at the height of the Great Recession.

Source: FRED

Source: JP Morgan

Unfortunately as it relates to Unemployment, it always looks brightest right before it turns for the worse. When unemployment it at or near decade-lows, it tricks us into thinking that the economy is certainly doing well. The economy does in fact grow and improve as the Unemployment Rate falls. However, the closer we get to the "turning point" or decade-low, the higher the probability that economic growth is about to reverse course.
In other words, Unemployment has dropped so much that this could be the best we'll see. 5% Unemployment is not bad! We should be happy that the US figured out how to keep unemployment low. But, if Unemployment is about to rise, that likely also means that economic growth is slowing.

If you look at the long-term chart of Unemployment Rate, you can see that a significant multi-year (even multi-decade) bottom in the Unemployment Rate preceded almost every single Recession since 1948 (Recessions shaded grey):

Another signal pointing to higher Unemployment is the major difference between the "Seasonally-adjusted" and "non-Seasonally-adjusted" Unemployment Rate numbers.

The government agencies like to "seasonally-adjust" official numbers in order to "smooth" out results and/or remove unjustified deviations due to catastrophes, one-time events, or season-related trends. This results in much smoother, less volatile results over time - as can be seen in the long-term Unemployment Rate charts.

Non-Seasonally-Adjusted:

Seasonally-Adjusted:

Most of the time, both the Seasonally-adjusted and Non-Seasonally-adjusted numbers trend in the same direction. But when they don't, a major trend change could be underway.

In our case, while the "Seasonally-Adjusted" Unemployment Rate made a long-term low of 4.9% last month (January 2016), the "Not-Adjusted" Unemployment Rate rose significantly to 5.3%!

Seasonally-Adjusted:

Not-Adjusted:

Both adjusted and not-adjusted numbers have moved together, but have now diverged. 

At the same time, Initial Jobless Claims have just bounced off 3-month lows and are off their 5+ year lows:

Unless the economy or jobs situation has improved over February, it looks like we could see an increase in Initial Jobless Claims and the resulting increase in Unemployment Rate.

Remember $2 Gas?

Enjoy the cheap $2 gasoline while you still can!

Due to the collapse in crude oil, gas prices have reached lows not seen since the depth of the Great Recession. But these extreme lows in oil and gas prices won't be here for long.

                                              Gas Prices

Crude oil and gasoline prices have moved largely in unison, both up and down:

Crude Oil vs. Gas

Oil prices are at lows not seen in years, decimated over the past 2 years and crashing by nearly 80 percent to $26/barrel since the ~$110/barrel highs in June 2014.

   Crude Oil Prices

Possible Reasons for the Bear Market in Oil & Commodities

1) Huge oversupply due to more effective drilling technology and domestic self-sufficiency.

2) Slowing economic growth around the world (Europe, China, Brazil, etc), leading to lower energy demand.

3) Deflation, where the prices of nearly all assets fall. Usually accompanied by economic recession and stronger US Dollar ($UUP).

4) Over-speculation in the Energy ($XLE) space, as is apparent by the exposure of energy companies in the Junk Bond market ($HYG) ($JNK).


What's Next?

The magnitude of oil's collapse was far greater than I had expected or even assumed possible. Though I clearly stated my expectations of oil dropping significantly due to the large deflationary forces and slowing global economic growth, I didn't think crude oil would fall by more than 50 percent. Oil was definitely not staying at $100/barrel, but $30/barrel? That's crazy cheap. 

Still, caution must be exercised, as a continued decline is not out of the question.
However, even though oil and energy can continue lower, the largest price drops are already behind us. Oil is a much better investment than most other assets because it has already been crushed, and the bad news is mostly or completely priced-in.

Oil is now "over-hated", as oil prices ($USO) and energy company valuations ($XLE) have been severely (and excessively) cut. Most investors are running away from Energy or are still too afraid to get in.

Contrary to most investors, oil and energy is a major bargain right here.
Now is the time to look at Energy investments.
Now is the time to pick up the scraps left in the wake of oil's collapse. 

There are definitely troubling times and even bankruptcies for some of the energy companies ($CHK, $UPL $LINN, etc.), but it's time to search for the viable companies selling for dirt cheap.
Even if some of your Energy investments get wiped out, some of these companies are golden opportunities for exponential returns (think 300-1000%+).

The outcome of the Oil Recovery and higher energy prices is both positive and negative:

On the positive side, investing in oil and energy is presenting a very rare opportunity to buy at the bottom near 20-year lows.
On the negative side, rising oil prices will result in higher fuel costs. You can probably forget about the extremely cheap $2/gallon Gas prices.

Even worse, those who neglect to invest in Oil and Energy now are likely to lose twice - once by missing the long-term bottom in oil, and once by having to pay more at the pump.

In a few years we will be talking about how low oil & gas prices were.
Oil prices are close to what they were in the 1980s and 1990s.
Now is the time to invest in oil.