Why the Good News on BofA May Be ‘Baked Into the Stock’

Why the Good News on BofA May Be ‘Baked Into the Stock’

Why the Good News on BofA May Be ‘Baked Into the Stock’

Bank of America stock has outperformed the S&P 500 so far this year.


David Paul Morris/Bloomberg


Bank of America

has been one of the better-positioned banks as the industry has navigated through the coronavirus pandemic and the current recovery. But analysts at Baird are cooling on the stock, saying much of the good news is already reflected in the stock price.

On Tuesday, the Baird team lowered its rating on Bank of America (ticker: BAC) shares to Neutral from Buy. Their target for the stock price is $42, implying a gain of 3.6% gain from recent trading levels. The bank’s valuation is hovering near historic peaks and has been trading well above the long-term median for some time, Baird said. 

“Bank of America has executed well during the pandemic, showing the strength of its franchise, healthy earnings power, and diversified business mix,”
David George,
analyst at Baird, wrote Tuesday. “However, we believe a lot of good news is now baked into the stock at current prices.”

The stock currently trades at nearly 10 times expected preprovision net revenue—its highest level since 1997, a time George referred to as the “bank nirvana period.”

Still, he isn’t entirely negative on the stock. “We realize we could be getting off the Bank of America train early and are cognizant of the view that rates going higher are generally positive for banks,” George wrote.

The bank has had an impressive run-up since March 2020, performing strongly due to the quality of its loan book and higher investment-banking activity. Even this year, shares have gained 32%, outpacing the 10% rise in the

S&P 500.

 

Still, Barron’s recently made Bank of America a stock pick, arguing that there is reason to believe the stock has more juice in it. Among the big banks, Bank of America is among the most sensitive to an increase in interest rates. Back in March, Chief Executive
Brian Moynihan
said earnings should “substantially increase” as rates rise.

Even failing a pickup in rates, Bank of America shares should benefit after the results of the Federal Reserve’s annual stress tests are released in June. It is expected that the bank and its peers will no longer face restrictions on share repurchases and dividends.

Bank of America shares were down 1.1% in early trading Tuesday, while the S&P 500 was off 0.9%.

Write to Carleton English at carleton.english@dowjones.com