Summary
- Bank of America's stock price corrects with 50% following COVID-19 fears.
- The impact of lower interest rates will be limited for Bank of America.
- Current valuation multiples create an opportunity for long-term value investors.
- Recent bounces indicate strength in the stock.
Investment Summary
It has been a volatile quarter for shareholders of Bank of America (NYSE:BAC). The stock price was performing pretty well in the past 4 years during which it outperformed the S&P 500 index (NYSEARCA:SPY). Then, the COVID-19 virus started impacting the market, and the stock price lost as much as 50% of its market value.
While the 50% correction in market value took place, the earnings of Bank of America have only been impacted to a certain degree. More specifically, we expect a (limited) increase in credit risk for the outstanding loan portfolio of BAC and an adverse impact of the lower interest rates.
In this article, we will anticipate the impact of the COVID-19 measures on the intrinsic value of BAC, and we will conclude the article with an investment proposal.
Recent Price Performance
BAC's stock price has been rising quite consistently in the past 3 years, outperforming the S&P 500 index with 50% over the period from January 2016 - December 2019. While the bank was not the strongest major bank (this position goes to JPMorgan (NYSE:JPM)), the bank did deliver a solid return on investment for its shareholders.
Source: stockcharts.com
The outperformance was turned into underperformance as the COVID-19 fears struck the stock market. Bank of America lost 24% during March 2020, while the stock market "only" lost 12%.
Measured from the high price of $35.7 (27 December 2019) to the low price of $17.95 (23 March 2020), the decline went as deep as -50%. As a long-time BAC stock observer, I can honestly admit I did not see this one coming.
Source: stockcharts.com
Bank of America was not the only bank stock which was underperforming the stock market, all major bank stocks declined materially. The worst impact was for Wells Fargo (NYSE:WFC) and Citigroup (NYSE:C).
