The key do’s and dont’s of investing in Bank of America (NYSE:BAC) involve knowing why you own it and remembering where its alpha will come from, and not seeing it mainly as a receptacle of Trump policy success relative to expectations.
Why does this matter? A high percentage of articles on Seeking Alpha discuss BAC mainly in terms of external variables like the yield curve, Trumpeconomics, and regulatory change. While these can all affect BAC (it’s a bank!), they aren’t factors that BAC controls. And expectations opposite these variables can change rapidly, wrongfooting overt bets on them moving one way or another.
You need to have a better reason to own BAC than it being a beneficiary of, say, measured monetary tightening, ongoing growth in the economy, a “pro-bank/business” policy nexus (Trump, Cohn) and moves over time to moderate some post crisis regulatory stringency. Sure, if you have a strongly negative view on any of these, you might want to sell. Such a view is not consensus so if you are right BAC will see downgrades and share price weakness regardless of the starting valuation. But this would apply to most any bank in the US. So it’s not a reason to sell BAC in particular.
BAC transcends the macro and broad sector reasons to own the stock by virtue of its self improvement path. This should generate profit growth that many bank names don’t have, as they are operating at a reasonably “optimal” position anyway and their valuations are advanced beyond the point of BAC’s.
The confusion of many is to think that because BAC’s improvement goals are quite well known, being the subject of much public discussion at conferences and on earnings calls, they “must be in the price” and aren’t something to own it for. This isn’t the case. Just as a merger arb spread will close over time as the completion date for the deal nears, so a medium term gain in, say, operating leverage will be subject to some discounting for risk until its completion is at hand. Look at how…