Bank of America Shares Slide After Downgrade From BMO

Analyst James Fotheringham acts solely on valuation and doesn't change his price target.
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Bank of America  (BAC) - Get Report shares fell Friday after BMO Capital Markets analyst James Fotheringham downgraded the stock to perform from outperform.

He acted “on the basis of valuation exclusively,” Fotheringham wrote in a report. He didn’t change his price target.

The stock has soared 40% over the past year, compared to 28% for the S&P 500 index. Much of the surge came in this year’s fourth quarter when the stock jumped 21%, its largest quarterly increase since 2016, according to Bloomberg.

The rally “had been long-overdue,” but sent Bank of America's valuation above its historical trend, Fotheringham said.

The bank's shares trade at 1.3 times book value, compared to its five-year average of 0.96, according to Morningstar.

Fotheringham likes other money-center banks better. “In contrast, Citigroup  (C) - Get Report and Morgan Stanley  (MS) - Get Report shares still trade at a discount,” he said. “While the economic backdrop remains supportive for U.S. large-cap banks, we encourage investors to stick with these discounted stocks during the current cyclicals rally."

As for the positive backdrop, “we forecast benign credit trends across the U.S. financial system for the next two years at least,” Fotheringham said.

For both Citigroup and Morgan Stanley, their current trailing and forward price-to-earnings ratios trail their five-year averages, according to Morningstar. To be sure, their current price-to-book values exceed their five-year estimates.

Fotheringham left his price target for Bank of America unchanged at $37. That implies a 7% total return, he said.

Bank of America traded at $35.05, down 1.59% on Friday. The S&P 500 declined 0.56%.