The Federal Reserve has yet again increased the short-term interest rate. Ordinarily, higher rates should be good for bank stocks. But we think it's time to turn bearish on Bank of America(BAC) - Get Report .
The reasons for this are purely technical. First, Bank of America has outperformed its peers so far this year, and this might set off a correction.
Second, at $25 a share, there is little upside left in the Brian Moynihan-led company.
Third, Bank of America trades at expensive valuations relative to its growth and competitors.
The company's recent performance has been encouraging. Bank of America's stock gained nearly 14% year-to-date (YTD) and 61% over the past six months.
By comparison, Citigroup(C) - Get Report has risen 2.3% YTD and 30% in the past six months. Rival JPMorgan(JPM) - Get Report has seen its share rise by 6.3% YTD and 38% in the past six months. And Bank of America has also beaten peers like Goldman Sachs(GS) - Get Report and Wells Fargo.
The stock is only expected to move up at most another dollar. The 30 analysts providing 12-month price estimates for Bank of America have a median target of $26.
This shows that the stock currently carries more risk than reward.
With a beta of 1.59, Bank of America may plummet further than the broader market if there is a correction. This is another reason why it is wise to take profits home from the company's stock.
Finally, Bank of America's shares are expensive relative to its peers. Bank of America's stock trades at 1.05 times book value, or the stock price versus the value of the assets on the company's balance sheet. By comparison, Citigroup's price-to-book value (P/B) is 0.82 times, 0.77 times for Credit Suisse, 0.57 times for Royal Bank of Scotland(RBS) - Get Report , and 0.38 times for Deutsche Bank.
While it must be noted that Bank of America's stock might be cheaper in price than JPMorgan's, Wells Fargo's, and Morgan Stanley's(MS) - Get Report , the company's limited upside will soon force investors to consider better growth opportunities.
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The author is an independent contributor who at the time of publication owned none of the stocks mentioned.