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Is Bank of America Stock Undervalued? Analysis Shows 83% Upside Potential

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Is Bank of America Stock Undervalued? Analysis Shows 83% Upside Potential

Bank of America stock (NYSE: BAC) is currently trading at $27 per share, which is 45% below its pre-inflation shock high of $49 on February 8, 2022. However, this undervaluation presents an opportunity for investors. Despite tough macroeconomic conditions, the bank’s strong net interest income growth and current market sentiment indicate a potential for significant upside.

Compared to the broader market, Bank of America stock has struggled in recent years, with a decline of 10% from early January 2021 to its current level. In contrast, the S&P 500 saw a 15% increase during the same period. However, it’s important to note that the stock’s performance has been volatile, with returns of 47% in 2021, -26% in 2022, and -18% in 2023 year-to-date.

To understand the potential for recovery, let’s examine how Bank of America performed during the 2007-2008 financial crisis. The stock saw a significant decline, losing almost 92% of its value from September 2007 to March 2009. However, it experienced a strong recovery, rising 281% between March 2009 and January 2010. This historical context suggests that the stock has the potential for substantial gains once market concerns subside.

In the current economic landscape, high oil prices and elevated interest rates have raised concerns about a potential slowdown and impacted investor confidence. However, our analysis suggests that Bank of America’s valuation could reach around $35 per share, indicating a 30% upside. Despite the uncertainties, the Federal Reserve’s efforts to tame inflation rates are expected to bolster market sentiments and benefit the bank’s stock.

Timeline of the Inflation Shock So Far

  • 2020 – early 2021: Increased money supply leads to high demand for goods.
  • Early 2021: Shipping disruptions and worker shortages impact supply chains.
  • April 2021: Inflation rates cross 4% and continue to increase rapidly.
  • Early 2022: Energy and food prices spike due to geopolitical tensions. Fed begins rate hike process.
  • June 2022: Inflation levels peak at 9% – the highest in 40 years. S&P 500 declines more than 20% from peak levels.
  • July – September 2022: Aggressive interest rate hikes by the Fed lead to market volatility.
  • Since October 2022: Continued rate hikes and improving market sentiments.
  • Since August 2023: Unchanged interest rates, but a potential rate hike remains possible.

It’s important to note that while a full recovery to the pre-inflation shock levels would require an 83% increase in Bank of America’s stock price, this may not happen in the near term. However, considering the current market conditions and the potential for improved sentiment, a valuation of $35 per share seems reasonable.

Bank of America’s fundamentals have also shown positive trends. While revenues slightly decreased from $91.2 billion in 2019 to $85.5 billion in 2020, growth in market-driven revenues led to a 4% increase in 2021. In 2022, revenues increased by 7% year-on-year, driven by improved net interest income due to interest rate hikes. Earnings also increased from $2.77 in 2019 to $3.21 in 2022.

Conclusion: Potential for Strong Gains

Considering the Federal Reserve’s efforts to control inflation and fears of a potential recession, Bank of America stock has the potential for significant gains once market concerns are allayed. While the stock has faced challenges in recent years, its historical recovery after the 2008 crisis suggests the possibility of a similar scenario in the current market. With a potential valuation of $35 per share and an upside of 83%, Bank of America stock presents an opportunity for investors seeking long-term growth.

Returns Oct 2023 MTD [1] 2023 YTD [1] 2017-23 Total [2]
BAC Return -1% -18% 22%
S&P 500 Return 2% 14% 96%
Trefis Reinforced Value Portfolio 1% 24% 539%

[1] Month-to-date and year-to-date as of 10/12/2023
[2] Cumulative total returns since the end of 2016

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.