I believe that Bank of America's (NYSE:BAC) stock is a bargain at today's price, but you should only buy or hold shares in the nation's second-biggest bank by assets if you're comfortable with volatility. The recent past offers a case in point.
Last month, China's central bank devalued the yuan in order to prop up its struggling economy and financial markets. This triggered elevated volatility in stocks in the United States, as traders and investors fretted over what a recession in China might mean for global economic growth.
But while the S&P 500 oscillated wildly, shares of Bank of America moved even more violently. You can see this in the chart below, which compares the daily change in Bank of America's stock to the S&P 500 on the 10 most volatile trading days since the beginning of August. (For the record, the chart shows the absolute value of the daily changes, meaning that both upward and downward movements are expressed in positive numbers.)
During these 10 days, Bank of America's stock moved by an average of 3.4%. The S&P 500, by contrast, moved by an average of only 2.6% during the same stretch.
This relationship is captured by Bank of America's "beta," which compares how much a single stock moves relative to the broader market on any given day. A stock with a beta of 1.0 should closely track the market. A stock with a beta that exceeds 1.0 moves more than the market on a daily basis. And a stock with a beta that's less than 1.0 is less volatile than the broader market.
Bank of America's beta, according to Finviz.com, is 1.8. This means it's roughly 80% more volatile than the typical stock.
Why is this? The answer has to do with Bank of America's daily trading volume -- that is, the number of shares that are traded on an average day. As you can see below, the Charlotte, North Carolina-based bank is the most heavily traded stock on the S&P 500, outpacing runner-up Apple by 29%.
Bank of America's share price, and the issues it has faced since the financial crisis, also play into this. Because its stock ($16 per share) costs less than, say, the iPhone maker's ($112 per share), it's particularly affordable for hedge funds and individual investors to trade in and out of. Additionally, the constant stream of news related to the $2.2 trillion bank causes traders to buy and sell its stock more frequently than less-newsworthy companies.
You can get a sense for this in the final chart below, which shows what happened to Bank of America's average daily trading volume once the crisis hit, causing its share price to plummet, and igniting the media firestorm that the bank has faced ever since.
Thus, to repeat, while I believe that Bank of America's shares are cheap at today's price, investors need to appreciate that future gains will come at the expense of elevated volatility in the present.
John Maxfield has no position in any stocks mentioned. The Motley Fool owns and recommends Apple. The Motley Fool recommends Bank of America. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.