After a bruising end to 2018 and a relatively volatile start to 2019, the time is finally right to buy Bank of America stock, BMO’s James Fotheringham wrote in a note to clients Tuesday.
Fotheringham upgraded Bank of America stock (ticker: BAC) to Outperform from Market Perform, keeping a $37 price target—about 34% above where the shares currently trade.
Shares of the second-biggest U.S. bank by assets are up more than 1.5% in early Tuesday trading, well ahead of the broad S&P 500 index’s increase of about 0.6%.
The back story. Trade-war worries, fears that the Federal Reserve was tightening too quickly, and rising probability of an American recessionbattered big bank stocks in the last three months of 2018. Bank of America stock fell almost 30% over that period.
Since that pummeling, the question for investors has been whether those fears, and the drop in the shares, was overblown. So far, investors have by and large answered yes and the stock is up more than 15% in 2019.
What’s new. Nevertheless, BMO’s Fotheringham points out that Bank of America stock is still trading at a “15% discount to the average multiple observed historically during benign economic conditions.” Currently, the stock is valued at 8.5 times rolling two-year forward P/E, he notes.
But valuation is not the only reason Fotheringham is bullish on Bank of America. He thinks that consensus earnings-per-share estimates will be revised higher. “Even in the event of a Fed rate cut, positive EPS revisions (from better fees, tax rates, provisions, and buybacks) should more than offset” any impact from falling interest rates, he says.
Looking ahead. About two-thirds of the upside Fotheringham sees in the stock is from valuation and one-third from revisions to consensus EPS numbers. The “most obvious risk” to the stock is a June rate cut from the Fed, but he thinks that will be more than offset by positive earnings revisions from Wall Street analyst.
