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Investing in 2020: Should Investors Ride the Wave With Bank of America?

By Amar Khatri - Updated Jan 18, 2020 at 3:26PM

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An expanding economy, stable interest rates, and the looming U.S. election are key factors when considering this and other banking stocks for the long term.

Bank of America (BAC -1.02%) reported a strong quarter to close out 2019. The top- and bottom-line results exceeded Wall Street expectations with revenue of $22.5 billion, $150 million higher than analyst projections, and EPS of $0.74 per share, which beat estimates by $0.06.

CEO Brian Moynihan noted that the results reflect "the strength of the U.S. consumer," which is evidenced by growth in spending activity among Bank of America customers -- up 5.9%, or $3 trillion, from 2018. Loan demand was also up during the quarter, a reflection of rising U.S. employment levels and growing wages. The U.S. economy continues to expand, and investors should consider this a key factor when investing in Bank of America.

Magnifying glass, stock charts, hundred dollar bills

Image source: Getty Images.

So if Bank of America reported solid earnings results and strong demand thanks to an expanding economy, why did the stock drop after earnings were released on Jan. 15? Lower interest rates were one reason, heavily affecting the company's revenue in the second half of 2019 and resulting in a 4% loss of profit year over year. As a result, management turned their focus to improving performance in loans and deposits, increasing attention to fee-generating businesses, and taking on additional risks. For example, The Wall Street Journal reported that the company's stock buybacks and share repurchases in 2019 helped improve EPS by $0.04 from a year earlier. This strategy allowed Bank of America to take advantage of its strong balance sheet to provide returns to shareholders.

BAC Chart

BAC data by YCharts.

Considering all this, should Bank of America remain a long-term choice for investors?

Investors are right to be concerned about interest rate stability, which is necessary for Bank of America's business to flourish -- especially its loans. If interest rates spike, the company's margins will rise. All this depends on the Federal Reserve, which currently maintains a steady outlook, given low unemployment and modest economic growth. While there are no obvious catalysts that would change this, investors will want to remain cautious ahead of the looming election cycle. A change in political party might bring uncertainty about regulatory changes; Democrats in particular might want to limit the number of buybacks companies can make.

That said, investors should feel positive about Bank of America's long-term growth for 2020. Management remains confident that performance will be consistent with that shown in 2019, and they foresee solid loan growth in the current economic environment. In addition, management expects the credit card business to continue to grow, with a focus on the profitability of the new accounts.

Comparing Bank of America with other potential investments in the banking space, including JPMorgan Chase (JPM -0.70%) and Goldman Sachs (GS -1.16%), shows that Bank of America's businesses go beyond trading and credit cards, with loan growth and digital banking particularly helpful in stabilizing the company over time. Its long-term advantages make Bank of America an attractive investment opportunity for 2020 and beyond. 

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Stocks Mentioned

Bank of America Corporation Stock Quote
Bank of America Corporation
BAC
$34.81 (-1.02%) $0.36
The Goldman Sachs Group, Inc. Stock Quote
The Goldman Sachs Group, Inc.
GS
$303.44 (-1.16%) $-3.55
JPMorgan Chase & Co. Stock Quote
JPMorgan Chase & Co.
JPM
$118.26 (-0.70%) $0.83

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