Bank of America Corp (NYSE:BAC) has underperformed the market over the past three years, but the stock has soared 68% higher over the past year. The entire financial sector has performed well over the past year thanks to a housing rebound and improving credit. However, many analysts are warning investors to exit their long positions in bank stocks. Should you heed this warning? And is there is a safer option than Bank of America Corp (NYSE:BAC)?
A rise in mortgage rates
Two arguments can be made here. On the bull side, rising mortgage rates benefit banks, because they lead to an increase in net interest margin. In other words, banks profit more on each loan.
On the bearish side, increased mortgage rates could lead to an end of the refinancing boom. Over the past several years, many people have been taking advantage of low mortgage rates to reduce their monthly payments. If mortgage rates increase, fewer people will be interested in refinancing.
Refinancing might save money, but there also many fees associated with it, and most people don’t want to be bothered with those fees and the overall headache unless they will be saving a lot of money. The good news is that even though mortgage rates have increased, they’re still incredibly low on a historical basis. Currently, the 30-year fixed stands at 3.98%.
The refinancing boom is actually already slowing, which has led Bank of America Corp (NYSE:BAC) to shift its focus back to home loan originations — new home loans. This move has paid off: Home loan originations brought in $24 billion in the first quarter, a 57% increase year over year.
An insider hint?
Prior to reading the following information, it’s important to understand that throughout the broader market, insiders haven’t been buying much at all. It’s a lot easier to find massive insider selling, which is frightening in itself. Therefore, when you find insider buying, it means something.
Bank of America Corp (NYSE:BAC) Director David R. Yost might not be the highest person on his company’s totem pole, and his insider purchases might not be very big by relative standards, but people only buy stock for one reason — they have reason to believe the stock will appreciate.
So far this year, Mr. Yost has made two purchases, one at $11.53 per share, and the other at $11.51. Combined, he purchased 40,000 shares. Total cost: $460,800.
It doesn’t matter how much wealth someone has accumulated over the years. No one is going to risk more than $450,000 unless they’re highly confident in their bet. For the record, Bank of America Corp (NYSE:BAC) is currently trading at $13.27, suggesting that Yost’s investment is doing quite well. More importantly, he hasn’t sold any shares yet.
Bank of America vs. peers
Big banks have enjoyed an astronomical ride over the past year. In addition to a strong housing market and improved credit, big banks are better capitalized than at any time throughout history. The chart below provides a clear share-price-performance picture.
According to the chart above, it would seem as though Citigroup Inc (NYSE:C) and Bank of America Corp (NYSE:BAC) are better options than Wells Fargo & Co (NYSE:WFC). However, that’s not necessarily the case.
The stock price performance chart below proves that Wells Fargo & Co (NYSE:WFC) has been the safest as well as most profitable investment over the long haul.
Are you wondering about valuation and dividend yield?
| Trailing P/E | Dividend Yield | |
|---|---|---|
| Bank of America | 14 | 0.30 |
| Citigroup | 18 | 0.10 |
| Wells Fargo | 12 | 3.00 |
Conclusion
Bank of America is riding the wave of a housing rebound, but is it really a rebound? Increasing home prices would indicate yes. However, much of the run-up in home prices has been due to speculative investments fueled by low interest rates. We have been down this road once before, and it didn’t end well.
Many insiders and analysts state that rising interest rates are good for the banks. Improving net interest margin translates to increased profits. But what if there isn’t as much to profit on? With interest rates gradually increasing, it’s only a matter of time before the supply and demand picture in housing skews to oversupply and decreased demand. This will be a net negative for Bank of America.
All that said, bull markets have a mind of their own, and they often last longer than analysts expect. Even if the fundamentals don’t add up, the market will find a way to continue its ascent. Therefore, more upside potential for Bank of America Corp (NYSE:BAC) is likely. On the other hand, Wells Fargo looks to be the better long-term option. It offers the best valuation, the highest yield, and it’s likely to be the safest option if the market heads south.
The article A Better Option Than Bank of America? originally appeared on Fool.com and is written by Dan Moskowitz.
Dan Moskowitz has no position in any stocks mentioned. The Motley Fool recommends Bank of America and Wells Fargo. The Motley Fool owns shares of Bank of America, Citigroup Inc (NYSE:C), and Wells Fargo. Dan is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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