What if I told you I found a stock that’s already discounted from recession jitters, has top-notch management, and a valuation you can wrap your arms around? And what if that same stock was actually a beneficiary of all those Fed rate hikes?
Oh, and a major competitor of the stock’s company is bruised from lots of scandals and fees?
That kind of stock would make a best pick for 2023, right?
Well, it’s my best pick, and it’s Bank of America (BAC) . Let me show you how this a bank stock that ought to be bought in the low $30s for gains of 20%-25% in the next 12 months.
As 2022 has demonstrated, valuation matters. Choppy market action will likely continue into the new year, shunning stocks with no valuation support. Bank of America is not a story stock or a glamour holding, it’s a bread-and-butter play on a too cheap valuation based on the bank’s massive earnings power.
The average consumer is actually in good shape to weather a recession — and the average Bank of America consumer is in even better shape — owing to it servicing a more affluent demographic.
In 2008, the recession led to enormous housing-related bank losses, especially for Bank of America via its acquisitions of Countrywide Financial and Merrill Lynch. Today, lending has been far more rational, and BAC is better prepared and well cushioned against housing losses. Although home prices have started to decline, home equity is near highs and most homeowners maintain low mortgage rates. Homeowners have around $30 trillion in equity, while mortgages only amount to $10 trillion, 30% of the total equity. Consumer credit card balances are still below pre-pandemic levels, although they have been rising throughout the past year.
History’s most widely anticipated recession is at our doorstep and stockholders have prepared by jettisoning economically sensitive stocks, including banks and brokerages. Investors have mostly ignored Bank of America’s de-risked balance sheet and the windfall of profits from Fed interest rate hikes that will bolster net interest income (NII). In BAC’s third quarter, NII increased to $13.8 billion, up 24% from 2021 — much of that $2.7 billion increase fell to the bottom line.
Bank of America won’t be blindsided next year by recession-related losses. The company’s economists predict a mild recession in 2023, and the bank’s provisions for losses expect a weighted average unemployment rate of 5% for the year. Nonetheless, investors fret about the long shadow over banks from the financial crisis over a decade ago.
Wells Fargo (WFC) , one of Bank America’s largest competitors, has been hobbled by scandals from consumer abuses and compliance breakdowns. Since 2018, the Fed has restricted Wells’ balance sheet growth. In part, this opened the door for Bank of America to rank at the top of retail banking.
In 2022, Bank of America paused large stock buybacks to build capital from a Fed-mandated increase; it’s now achieved excess capital levels. Shares will benefit from a ramp back up of buybacks over the next few quarters on top of a 22-cent quarterly dividend, a yield of 2.7%. Bank of America’s book value is around $30, and shares are currently trading at a relatively low historical 7% premium to book. Analysts expect earnings of $3.70 per share, up from $3.16 in 2022, for a bargain forward price-to-earnings of 9.
By the end of 2023, book value will likely exceed $32 per share from buybacks plus retained earnings. A multiple of 1.2-times book with a 10 price-to-earnings is a reasonably conservative expectation by year-end.
The U.S. is probably headed toward a recession that everyone expects. Bank of America’s economists have warned of a recession ahead of Wall Street. Expect a challenging and choppy ride for stocks. But with BAC already discounting economic concerns, the shares are too cheap to ignore.
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Source: https://realmoney.thestreet.com/investing/stocks/bank-of-america-16112248?puc=yahoo&cm_ven=YAHOO&yptr=yahoo