When you are looking for a new stock to add to your portfolio, it is a lot of fun to do your research in hopes of finding that needle in the haystack that will deliver big returns. But sometimes that needle is staring you straight in the face or even pricks you for good measure. While you may want to dig deeper into the haystack, there is no point when the obvious choice is right in front of you.
In this case, the obvious choice is Bank of America (BAC 0.12%). Here's why Bank of America is the next stock I'm going to buy.
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A market leader with great diversity of revenue
One of the things I look for as an investor is a company that is either a market leader or has a killer competitive advantage that could someday make it a market leader. Bank of America is already there, as the second-largest bank in the country, with $3 trillion in assets, well ahead of the next-largest rivals, Citigroup and Wells Fargo.
Like its primary rival, JPMorgan Chase, Bank of America has diverse revenue streams -- all of which are among the market leaders. Consumer banking is its largest business, with about $8 billion in revenue in the second quarter, but the other three are all pretty equal in terms of revenue. Global wealth and investment management made about $5.1 billion in sales last quarter, as did global banking, which is its investment banking arm. Global markets, which is its institutional trading and research business, generated about $4.7 billion in revenue last quarter.
This great diversity allows Bank of America to persevere during difficult times. In 2020, an extremely tough year for banks, the stock was down only 11%, better than most of its peers -- except JPMorgan Chase. So while consumer banking and wealth management were down, investment banking was solid and global markets was up, as volatile markets led to increased trading activity.
This year, Bank of America has seen the opposite occur. In the second quarter, it missed analysts' revenue estimates by about $200 million as revenue overall was down about 4% to $21.5 billion. In terms of revenue, three of the business lines were either up or flat. Global markets, the trading business, was down about $700 million due to a decrease in trading activity, accounting for the revenue miss. Net income, however, was up more than double to $9.2 billion from $3.5 billion a year ago due to a reserve return this quarter and a huge provision for credit losses last year. This diversity of revenue allows Bank of America to weather market ups and downs better than most of its peers -- again, save for JPMorgan Chase.
Built for the long haul
Bank of America closed trading Monday at $41.29 per share, with a reasonable price-to-earnings (P/E) ratio of 13.8 and price-to-tangible-book-value (P/TBV) ratio of 1.9. But Bank of America is no value trap -- we can see evidence of effective management in the bank's operating margin of 32% and an efficiency ratio that's down to 59% (this metric measures operating expenses as a percentage of revenue, so lower is better).
JPMorgan Chase is another excellent bank stock at a good valuation, and one could certainly make the argument for buying it (it is, in fact, on my buy radar). But while the two have similar growth prospects, I think Bank of America has the edge in one important factor.
As mentioned earlier, Bank of America is a market leader in most of its businesses. This diversity of revenue is a competitive edge in and of itself, but what sets Bank of America apart is its leadership position in digital banking. It has over 40 million customers using digital banking, the most of any bank, and it continues to grow as the bank invests in it to enhance its capabilities. It was recently ranked No. 1 by J.D. Power for online and mobile banking satisfaction. David Tyrie, head of digital at Bank of America, said digital clients are "at the center" of everything the bank does. "We're enhancing our digital channels on an ongoing basis to provide our clients a personalized experience across their entire relationship with us," he said. This puts Bank of America in a great position to sustain its leadership position in the future.
Bank of America's stock is up roughly 36% year to date, which is better than the industry average. But I'm not concerned about the short-term returns with this stock. This is a long-term play that I'm confident will deliver market-beating returns over time, without a whole lot of stress.
