3 Reasons to Avoid BAC and 1 Stock to Buy Instead

What a time it’s been for Bank of America. In the past six months alone, the company’s stock price has increased by a massive 42.5%, reaching $50.70 per share. This run-up might have investors contemplating their next move.

Is now the time to buy Bank of America, or should you be careful about including it in your portfolio? Get the full breakdown from our expert analysts, it’s free for active Edge members.

Why Is Bank of America Not Exciting?

We’re happy investors have made money, but we don't have much confidence in Bank of America. Here are three reasons why BAC doesn't excite us and a stock we'd rather own.

1. Long-Term Revenue Growth Disappoints

From lending activities to service fees, most banks build their revenue model around two income sources. Interest rate spreads between loans and deposits create the first stream, with the second coming from charges on everything from basic bank accounts to complex investment banking transactions.

Unfortunately, Bank of America’s 3% annualized revenue growth over the last five years was mediocre. This was below our standard for the banking sector.

2. Net Interest Income Points to Soft Demand

Net interest income commands greater market attention due to its reliability and consistency, whereas one-time fees are often seen as lower-quality revenue that lacks the same dependable characteristics.

Bank of America’s net interest income has grown at a 4.8% annualized rate over the last five years, worse than the broader banking industry. Its growth was driven by both an increase in its outstanding loans and net interest margin, which represents how much a bank earns in relation to its outstanding loan book.

3. Low Net Interest Margin Reveals Weak Loan Book Profitability

Net interest margin (NIM) represents how much a bank earns in relation to its outstanding loans. It's one of the most important metrics to track because it shows how a bank's loans are performing and whether it has the ability to command higher premiums for its services.

Over the past two years, we can see that Bank of America’s net interest margin averaged a poor 2%, reflecting its high servicing and capital costs.

Final Judgment

Bank of America isn’t a terrible business, but it doesn’t pass our quality test. After the recent rally, the stock trades at 1.3× forward P/B (or $50.70 per share). Beauty is in the eye of the beholder, but our analysis shows the upside isn’t great compared to the potential downside. We're pretty confident there are more exciting stocks to buy at the moment. Let us point you toward a safe-and-steady industrials business benefiting from an upgrade cycle.

Stocks We Would Buy Instead of Bank of America

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