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Bank of America Stock is Overbought

Bank of America (BAC) has blown up in the last year. After a strong quarterly report on the heels of improving Bank of America earnings in previous periods, the financial stock is up over 100% in the last 12 months.

That’s great if you bought in a year ago, but new money may want to consider overlooking Bank of America stock right now.

Yes, it’s great to see bank stocks bouncing back. This quarter we saw good earnings beats from a number of financial companies including retail banks like J.P. Morgan Chase & Co. (JPM) and Citigroup (C) as well as  investment banking names like Morgan Stanley (MS) and Goldman Sachs (GS).

But while earnings are great, its undeniable that revenue is flat — and remains down significantly from just a few years ago. Consider that in fiscal 2009, Bank of America earnings for the full-year tallied revenue north of $150 billion. Now, Bank of America revenue is lucky to top $90 billion on the year.

This is the real tale behind financial stocks — one of cost cutting and efficiency to prop up profits in the face of stagnant top lines. And while there is optimism about a recovery turning things around, stocks like Bank of America that have doubled in the last 12 months seem to have that optimism clearly priced in.

Take the mortgage market as one specific element of the financial sector’s recovery. That strength in housing has already been baked into bank stocks, including shares of Wells Fargo (WFC) that used crisis-era conditions to suck up a third of the mortgage origination market as well as mortgage-specific businesses like MGIC Investment Corp (MTG) and Radian Group (RDN) that provide mortgage insurance for FHA loans.

This has resulted in improving book values across the industry. Stocks that used to trade for deep discounts are now fairly valued. JPM actually trades for slightly above book value right now, and Wells Fargo is trading at a big premium.

The time to buy banks based on a housing recovery has long past — and frankly, I think the time to buy based on 2014 optimism is behind us, too.

There are reasons that the bulls may keep buying Bank of America stock. BAC still trades at a roughly 25% discount to book value, and if it manages to get Federal Reserve approval to move its dividend higher we could see some significant buying from income investors who have written Bank of America stock off thanks to its measly payout.

However, most of that gains are behind us in this recovery play. I’d be reluctant to buy more Bank of America stock at these levels.

Related Reading:

  • Then there’s the litigation risks hanging over some bank stocks… (Reuters via Daily Finance)
  • Bank analyst Philip van Doorn says JPM is super cheap, however. (The Street)
  • Jon Ogg talks about the broad dilemma of increasing book values across the sector. (24/7 Wall Street)

Jeff Reeves is the editor of and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at or follow him on Twitter via @JeffReevesIP. As of this writing, he did not own a position in any of the stocks named here.


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