How do you thread the needle? A caller asked me tonight what to do with Bank of America's (BAC) stock. This stock, this behemoth, just had a parabolic move from $16 to $20. It's a total spike.
Ideally, you never want to chase a spike. You have to wait. You have to be patient. You are rarely awarded when you pile in after a move this big, even as you did get a minor pullback yesterday.
I said that if it sold off to $18 and change, that would be a great level to pull the trigger.
But in retrospect, one has to ask: if you think that Bank of America could be in for a big run what is the difference between $18 and $19? What does it matter? Why not just go buy it?
This is the decision facing a ton of people right now: whether to come in on top of this rally or wait for a pullback -- and if it even matters.
We saw a half dozen prominent bank stock downgrades today, almost all of which I put in the category of too much, too fast. I get that; these downgrades were pretty much based on exactly the kind of reasoning I just mentioned: we just had a big move; there will be a better time to buy.
But here's the problem with that thinking. Last year at this time, we were concerned about multiple rate hikes that never occurred.
Now if there were ever a time for multiple rate hikes, it would be when you have a president that wants to cut taxes and spend. Anyone going that route is going to gin up growth and most likely, some inflation, even in this deflationary economy.
So why should Bank of America necessarily stop at $20? It's got the largest deposit base in the country. It is by far the more levered to short-term rates of any publicly traded institution. It's BAC's time. What's the difference of a dollar if a new rate cycle -- and era -- is upon us?
I think that for the longest time we had a basic reluctance to pay more than tangible book value for almost any bank other than Action Alerts PLUS charity portfolio holding Wells Fargo (WFC) . Now, that's the one bank we have a reluctance to do so -- even though we are -- and the rest are trading above book. Bank of America is now $3 above tangible book, after spending years in the wilderness. It's almost as if the gating factor that had held these stocks back has vanished and investors want these stocks as growth stocks not value plays.
That's right; we are thinking that there could be an earnings stream of growth from loans and income from net interest margin. The dividend hikes, the buybacks, those are just gravy. And if you dismantle Dodd-Frank, which costs these big banks literally billions of dollars to comply with, you take out a huge amount of regulatory cost.
No wonder these stocks have gone from worst to first.
But there is still the nagging issue of price. What do you pay for Bank of America, knowing you missed the move from $16 to $20?
I think the answer is that if you believe there are going to be multiple rate hikes, like I do, you wait to see if it gets back to $18, but that you accept that you may end up paying $20 because in this new regime I just don't think the buyers will let it go back to $16. It's as good a stock to own in a Trump regime as it would be to short in a Hillary regime.
Your best hope may be to scoop some up at a little discount to here based on the disarray in Washington and the worries that the speed with which things can be accomplished -- or lack thereof -- isn't as positive as the move has been itself.
So, I still want the pullback, but, in retrospect, I totally understand why someone wouldn't want to say "hey, Jim, if you are right, $19's the same as $18" and they just pull the darned trigger now.
