Key Points
Bank of American is one of the world's largest financial institutions.
Although the bank offers a well-above-market 2% yield, the recent stock price rally has stretched its valuation.
There are things to like about Bank of America (NYSE: BAC). And there are things that investors might be worried about, too. With the stock having rallied roughly 25% from its 52-week low, as of this writing, is it worth buying? Should you hold? Or should you avoid or sell it? Here's a quick look at the case for each.
Buy Bank of America stock?
Bank of America is one of the world's largest financial companies. The only larger bank is JPMorgan Chase (NYSE: JPM). Bank of American's business isn't just the local corner bank, either. It offers traditional banking, investment banking, and investment management. It has grown beyond the borders of the United States to operate on the global stage as well. If you are looking to buy a large bank, Bank of America is a good business to consider. Add in the 2% yield, which is well above the roughly 1% yield of the S&P 500 index (SNPINDEX: ^GSPC), and a lot of investors will likely find the stock compelling even after the price run. It is likely one of the largest and best-run banks in the world.
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Hold Bank of America?
The reason to hold onto Bank of America stock is pretty much the same as the reason to buy it. The difference is when you bought it and why. If your goal was to own a large, well-run bank for the long term, then selling after a 25% run probably doesn't make much sense. There's nothing in the company's recent business performance to suggest it will stumble and become a second-tier bank. Count yourself lucky if you saw the benefit of the price advance, and focus on the company's still-strong fundamentals.
Sell or don't buy Bank of America?
That said, the average bank has a slightly higher dividend yield of 2.1%. That suggests that Bank of America is being afforded a premium compared to its peers. A view that is backed up by the fact that the bank's price-to-sales, price-to-earnings, and price-to-book value ratios are all above their five-year averages. In other words, after a quick stock rally, Bank of America stock looks a little expensive. If you are a value investor, you probably won't be interested. If you are a dividend investor, you can find higher-yielding banks. And if you bought it as a short-term investment because it was cheap, well, it's no longer cheap. Selling or not buying could be the right decision.
Bank of America didn't change; Wall Street's perception did
The truth is, nothing material has changed about Bank of America since it hit its 52-week low. What's different is investor perception. If you are a long-term investor, short-term mood swings on Wall Street shouldn't drive your investment decisions. But if you are a short-term investor or considering the stock now, you should take its elevated valuation into account when making your final investment decision.
Bank of America is an advertising partner of Motley Fool Money. JPMorgan Chase is an advertising partner of Motley Fool Money. Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends JPMorgan Chase. The Motley Fool has a disclosure policy.