Bank of America Corp (NYSE:BAC) has underperformed the market over the past three years, but the stock has soared 68% higher over the past year. The entire financial sector has performed well over the past year thanks to a housing rebound and improving credit. However, many analysts are warning investors to exit their long positions in bank stocks. Should you heed this warning? And is there is a safer option than Bank of America Corp (NYSE:BAC)?
A rise in mortgage rates
Two arguments can be made here. On the bull side, rising mortgage rates benefit banks, because they lead to an increase in net interest margin. In other words, banks profit more on each loan.
On the bearish side, increased mortgage rates could lead to an end of the refinancing boom. Over the past several years, many people have been taking advantage of low mortgage rates to reduce their monthly payments. If mortgage rates increase, fewer people will be interested in refinancing.
Refinancing might save money, but there also many fees associated with it, and most people don’t want to be bothered with those fees and the overall headache unless they will be saving a lot of money. The good news is that even though mortgage rates have increased, they’re still incredibly low on a historical basis. Currently, the 30-year fixed stands at 3.98%.
The refinancing boom is actually already slowing, which has led Bank of America Corp (NYSE:BAC) to shift its focus back to home loan originations — new home loans. This move has paid off: Home loan originations brought in $24 billion in the first quarter, a 57% increase year over year.
An insider hint?
Prior to reading the following information, it’s important to understand that throughout the broader market, insiders haven’t been buying much at all. It’s a lot easier to find massive insider selling, which is frightening in itself. Therefore, when you find insider buying, it means something.
Bank of America Corp (NYSE:BAC) Director David R. Yost might not be the highest person on his company’s totem pole, and his insider purchases might not be very big by relative standards, but people only buy stock for one reason — they have reason to believe the stock will appreciate.
So far this year, Mr. Yost has made two purchases, one at $11.53 per share, and the other at $11.51. Combined, he purchased 40,000 shares. Total cost: $460,800.
It doesn’t matter how much wealth someone has accumulated over the years. No one is going to risk more than $450,000 unless they’re highly confident in their bet. For the record, Bank of America Corp (NYSE:BAC) is currently trading at $13.27, suggesting that Yost’s investment is doing quite well. More importantly, he hasn’t sold any shares yet.
Bank of America vs. peers
Big banks have enjoyed an astronomical ride over the past year. In addition to a strong housing market and improved credit, big banks are better capitalized than at any time throughout history. The chart below provides a clear share-price-performance picture.