Bank of America Corp. (BAC) is trading near a 2-month high after legendary investor Warren Buffett and his Berkshire Hathaway Inc. (BRK/A) purchased more than 20 million shares. The transactions, dated between July 28 and July 30, place a $520 million bet that U.S. bank chains will recover from adverse economic conditions in the next one or two years. The high stakes wager looks dangerous from an outsider’s viewpoint, given high odds for a protracted recession in a low interest rate environment that weakens industry profits.
Bank Of America Plagued By Industry Headwinds
The commercial banking sector has lagged major indices since the 2008 economic collapse, undermined by weak investment, low interest rates, and the funneling of corporate profits into stock buybacks, rather than capital spending that generates consistent loan income. Bank of America has underperformed both broad benchmarks and industry peers during this period and is now trading at October 2008 price levels.
The stock sold off after July earnings, despite beating top and bottom line Q2 2020 estimates. CEO Brian Moynihan set a somber tone during the conference call, warning that “economic predictions have been revised, and the forward path has deteriorated from last quarter. Baseline projections now extend the length of the recessionary environment deep into 2022. We provide substantial additional reserves for expected future credit losses this quarter to reflect that, and that has impacted our earnings.”
Wall Street And Technical Outlook
Wall Street has issued no upgrades or downgrades since the purchase, maintaining a ‘Moderate Buy’ consensus based upon 5 ‘Buy’, 5 ‘Hold’, and 1 ‘Sell’ recommendation. Analyst caution makes sense, given adverse economic conditions as well as Buffett recently taking a $9.8 billion write down on a losing Precision Castparts bet. Price targets currently range from a low of $23 to a street-high $38 while the stock is now trading about $1 below the $27.50 median target.
Technical speaking, Bank of America remains stuck in a major downtrend after breaking the 200-day EMA on heavy volume in February 2020. It failed a June test at this resistance level while the uptick into August has lifted price back to this inflection point. Unfortunately, even stronger resistance is situated less than three points above this barrier, lowering odds the stock will rally back to the February 2020 high until 2021, at the earliest.