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 (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 YChartsThe 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.
