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If you’re interested in big-time value, as well as support from an investing legend, look no further than Bank of America (NYSE:BAC). But for investors seeking more ‘tangible’ margin of safety with a BAC stock position, there’s more to owning shares wisely. Let me explain.
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What is Wall Street thinking? Record highs and outlier returns have been a regular occurrence in the Nasdaq for nearly three months, despite Covid-19 still wreaking havoc on many Americans daily lives, businesses, and the economy at large. The rally seems unfair, right? And maybe in some ways it is.
Yet it’s hard to ignore ever-larger, influential stocks like Amazon (NASDAQ:AMZN) or Apple (NASDAQ:AAPL). There’s also increasingly important up-and-comers in today’s socially distanced environment to consider. Zoom Video (NASDAQ:ZM) or Peloton (NASDAQ:PTON) are among those companies thriving within the pandemic and helping back the Nasdaq’s accomplishments.
Still, in a market made up of stocks removed from a momentum theme occurring in the broader tech space, the investing environment has remained much less generous. Opportunistically, one victim of this popularity is Bank of America, whose shares are offering solid value for BAC stock investors. But don’t take my word for it.
Buffett’s Bet on BAC Stock
Over the past month, value-centric investor Warren Buffett’s Berkshire Hathaway (NYSE:BRK.B) added to its stake in BAC stock. It’s a big deal and in more than one way. Not only has the outfit bought up more than 85 million shares since July 20, the increase puts the company’s total stock position at just over 1 billion shares.
Berkshire’s exposure to BAC is only second to its Apple stock holding. Maybe more intriguing, as Apple is valued at $2 trillion dollars, the investment firm now owns 11.9% of Bank of America. The action signals the company is confident using its recent Fed-approved application to own up to 24.9% of the banking giant. That’s nearly 2.5x the standard 10% threshold for large investors.
With room for Berkshire to buy an additional 13% interest in BAC shares, it’s a nice backstop for other investors to have in place. What’s more and as InvestorPlace’s Mark Hake recently wrote, there’s plenty of upside potential. The article thoughtfully walked readers through some value-supported number crunching, which conservatively puts BAC near $35 by the end of next year, along with the added benefit of a dividend stream approaching 3%.
BAC Stock Monthly Chart
Source: Charts by TradingView
Aside from the support Berkshire Hathaway is providing for shares, Mark puts BAC’s tangible book value per share, or TBVPS, just north of $22 using earnings estimates. Nice, right? There’s also the banker’s stock chart to consider. BAC’s under-performance and the path it has taken to get there make shares very attractive-looking as well.
Technically and as the monthly chart reveals, shares of BAC have built a steeper, but manageable uptrend since the March Covid-19 bottom. The price action is complimented by stochastics trending out of an oversold condition and a larger up-channel that began during the 2008 – 2009 financial crisis. It’s a bullish picture, but not one without its temporary setbacks.
The current bullish trend formed a pattern high in June. That month shares failed to clear 2020’s cycle 62% retracement level and the same key Fibonacci level established from BAC’s 2006 all-time high into 2009’s bottom. Ominously, the price action formed a bearish shooting star candlestick. But July’s quick countering reversal off the 50% level sets the stage for a reassertion of the uptrend.
The observation is a second challenge of resistance will see shares break through the technical barrier and rally to new relative highs in the coming months. Longer-term, the outlook is for BAC stock to capture gains in keeping with value forecasts off the price chart like the one offered by Mark.
For now, and to make those returns more tangible and less exposed to the whims of Wall Street, I’d recommend collaring BAC with a collar strategy. Specifically, the October $24 put / $28 call collar combination is favored. Priced for $26.04 versus owning the stock outright for $25.86, that’s money well-spent and invested smartly for a bullish future, but also well-prepared for the occasional bump in the road.
Chris Tyler is a former floor-based, derivatives market maker on the American and Pacific exchanges. Investment accounts under management do not currently own any securities mentioned in this article. The information offered is based on his professional experience but strictly intended for educational purposes only. Any use of this information is 100% the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT and StockTwits.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.