Here is the next stock that I will buy
When looking for a new stock to add to your portfolio, it is a lot of fun to do your research in the hopes of finding that needle in the haystack that will produce big returns. But sometimes that needle will star you straight in the eye or even prick you for good measure. While you might want to dig deeper into the haystack, there’s no point in having the obvious choice in front of you.
In this case, the obvious choice is Bank of America (NYSE: BAC). Here’s why Bank of America is the next stock I’m going to buy.
A market leader with a wide variety of revenues
One of the things that I look for as an investor is a company that is either a market leader or a competitive advantage that could someday make it a market leader. Bank of America is already there, as the country’s second-largest bank, with $ 3 trillion in assets, well ahead of the next major rivals, Citigroup and Wells fargo.
Like its main rival, JPMorgan Chase, Bank of America has a variety of revenue streams, all of which are among the market leaders. Consumer banking is its biggest business, with around $ 8 billion in revenue in the second quarter, but the other three are all roughly equal in terms of revenue. Global wealth and investment management reported sales of around $ 5.1 billion last quarter, as did the World Bank, which is its investment banking arm. Global Markets, which is its institutional trading and research business, generated approximately $ 4.7 billion in revenue last quarter.
This great diversity allows Bank of America to persevere in difficult times. In 2020, an extremely difficult year for banks, the stock fell only 11%, better than most of its peers – with the exception of JPMorgan Chase. So while personal banking and wealth management were down, investment banking was strong and global markets were up as volatile markets led to increased trading activity.
This year, Bank of America has seen the opposite happen. In the second quarter, it missed analysts’ revenue estimates by around $ 200 million, as overall revenue fell about 4% to $ 21.5 billion. In terms of turnover, three of the businesses are either up or stable. Global markets, trading activity, fell by about $ 700 million due to a decrease in trading activity, which explains the lack of income. Net income, however, more than doubled to $ 9.2 billion from $ 3.5 billion a year ago due to a return on reserves this quarter and a huge allowance for credit losses. last year. This diversity of income allows Bank of America to withstand market fluctuations better than most of its peers – again, with the exception of JPMorgan Chase.
Built for the long haul
Bank of America closed trading on Monday at $ 41.29 per share, with a reasonable price-to-earnings (P / E) ratio of 13.8 and a tangible price-to-book (P / TBV) ratio of 1.9. But Bank of America is not a value trap – we can see evidence of efficient management in the bank’s operating margin of 32% and an efficiency ratio that is down to 59% (this measure measures operating expenses as a percentage of revenue, so less is better).
JPMorgan Chase is another great bank stock with a good valuation, and the case could certainly be made for buying it (it’s, in fact, on my buying radar). But while the two have similar growth prospects, I think Bank of America has the edge in one big factor.
As mentioned earlier, Bank of America is a market leader in most of its businesses. This diversity of income is a competitive advantage in itself, but what sets Bank of America apart is its leadership position in digital banking. It has more than 40 million digital banking customers, the most of any bank, and it continues to grow as the bank invests in it to improve its capabilities. It was recently ranked # 1 by JD Power for online and mobile banking satisfaction. David Tyrie, chief digital officer at Bank of America, said digital customers are “at the center” of everything the bank does. âWe are constantly improving our digital channels to provide our customers with a personalized experience throughout their relationship with us,â he said. This places Bank of America in an excellent position to maintain its leadership position in the future.
Bank of America stock is up about 36% year-to-date, which is better than the industry average. But I am not concerned about the short term returns of this stock. This is a long term game that I am sure will produce above market returns over time without much stress.
This article represents the opinion of the author, who may disagree with the âofficialâ recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.