Analysts and commentators have been expecting Bank of America's (NYSE:BAC) stock to surge for the past two years. But no one could have guessed that it'd rocket higher by 45% over the course of only three months.
Yet that's exactly what's happened. The unexpected outcome in last November's presidential election sent a jolt through the markets, pushing stocks up across the board. But it was the bank industry that benefited the most.
Trump's promise on the campaign trail to reduce regulations in the financial services industry coupled with hope that his pro-business tilt would cause interest rates (and thereby bank profits) to rise, led investors to buy bank stocks by the barrel.
Financial stocks were the most popular sector among hedge funds in the fourth quarter, according to a recent report by FactSet. The 50 biggest funds purchased $3.5 billion worth of stocks in the financial industry from the beginning of October through the end of December. The runner-up healthcare industry saw an inflow of $3.4 billion from the same group.
Within the financial services industry, moreover, there was one stock that separated itself from the pack: Bank of America. Almost half the inflow from large hedge funds into the financial services sector went into Bank of America stock -- $1.5 billion to be precise.
The North Carolina-based bank was especially popular for two reasons. First, it's the most asset-sensitive large-cap bank, meaning that it will profit more than other banks from an anticipated increase in interest rates. The rate increases in the fourth quarter alone will translate into $600 million worth of additional net interest income for Bank of America this year.
On top of this, Bank of America's stock was trading for one of the lowest valuations in the industry. At the beginning of November, its stock sold for a 30% discount to book value. By comparison, the average big bank stock tends to sell for book value or a little higher.
This may go without saying, though it's still worth pointing out, that Bank of America's shares are no longer cheap. Thanks to the 45% rally since the beginning of November, its shares now trade for a 3% premium to its book value.
One can argue about whether this is a fair price or not. I tend to think it's high, given that Bank of America's profitability comes in at the lower-end of its peer group. Yet, it isn't an egregiously expensive stock if the lion's share of expectations are met by the current presidential administration -- which, of course, remains to be seen.