My highest-conviction funding concept in the course of the COVID-19 crash was the American banking sector, particularly the SPDR S&P Financial institution ETF (NYSE: KBE).
American banks went into the pandemic with traditionally sturdy stability sheets.
They had been at no threat of failure.
On high of that, the rock-bottom valuations that had been accessible because the market panicked made this exchange-traded fund a rare alternative.
This financial institution commerce labored out nice. The banking sector doubled inside a yr, far outpacing the S&P 500.
Now right here we’re within the midst of one other market panic within the monetary sector. And I imagine alternative is knocking once more.
To me, Financial institution of America (NYSE: BAC) stands out as a beautiful funding alternative.
Since early February of final yr, Financial institution of America’s inventory value has dropped from just below $50 to $28.
That may be a steep decline of 42%. These shares have to virtually double simply to get again to the place they had been early final yr.
However I believe Financial institution of America truly stands to profit from the present disaster.
As concern over the protection of regional banks has risen, prospects have truly been looking for refuge within the perceived security of the most important banks, like Financial institution of America.
Within the days after the collapse of Silicon Valley Financial institution, greater than $15 billion in new deposits flowed into Financial institution of America.
As an alternative of a “run on” the financial institution – which spelled the tip for Silicon Valley Financial institution – Financial institution of America is experiencing a “run to” the financial institution.
If this banking disaster worsens, I anticipate more money to movement from smaller regional banks and into the handful of “too massive to fail” banks, like Financial institution of America.
As an investor, I like that Financial institution of America has an extremely diversified deposit base.
I believe that is the important thing cause Warren Buffett owns a whopping $33 billion price of Financial institution of America inventory, representing 13% of the corporate.
As of December 31, 2022, Financial institution of America had greater than $1.9 trillion in buyer deposits. Nearly 113 million of them had balances of lower than $250,000 and are eligible for Federal Deposit Insurance coverage Company (FDIC) insurance coverage.
That is precisely the alternative of Silicon Valley Financial institution, which had one of the vital concentrated deposit bases within the trade – an enormous proportion of which weren’t FDIC insurable.
That is what made Silicon Valley Financial institution susceptible to a mass exodus of buyer money.
This yr, the consensus analyst estimate is for Financial institution of America to earn $3.41 per share. For subsequent yr, these expectations rise to $3.64 per share.
Meaning this massive financial institution is at the moment buying and selling at 8.2 occasions this yr’s earnings and simply 7.6 occasions 2024 earnings.
That could be very low-cost for one of the vital necessary banks on this planet.
Additionally enticing is Financial institution of America’s dividend, which is at the moment set at $0.22 per quarter. That’s a yield of three.14%.
The present banking disaster has set us up with a really enticing entry value for Financial institution of America.