With shares of Bank of America (NYSE:BAC) trading around $11.50, is BAC an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:
C = Catalyst for a Stock’s Movement
Bank of America is in an industry that has taken some heat and is in the early stages of a recovery. The company made major headlines during the financial crisis and continues to do so now. However, the financial industry is the backbone of our economy, and love it or hate it, it is needed. As a major player in this industry, Bank of America has the resources it takes to turn things around and continue its advance.
T = Technicals on the Stock Chart are Strong
Bank of America’s long term trend leaves little to be envious of. It is currently trading at about one-fifth of the price it was in 2007 and looks to be in a recovery from a long-term descending trend. From a 2011 low of $4.92, the stock has more than doubled, in a consistent uptrend consisting of higher highs and higher lows, and it is now trading near $11.50 per share. Bank of America stock also broke above a long-term descending trendline last year, so it may very well be headed towards $15 per share, a major price level.
Moving averages may help interpret a trend with more ease. Essentially, the placement of the stock price relative to its key moving averages is important as well as the direction and order of these averages. What are the key moving averages? The 50-day, 100-day, and 200-day simple moving averages. How do Bank of America’s simple moving averages look? Today, Bank of America stock is trading above its 100-day and 200-day and consolidating around its 50-day simple moving average.
The slope of these moving averages evaluates the strength of the trend. Bank of America’s moving averages are all sloping upwards, which signals strength in the uptrend. Bank of America stock is battling it out around its 50-day moving average but is supported by a strong uptrend, as interpreted from the simple moving averages.
Investor sentiment is another key to the success of a stock. One way to gain perspective into investor sentiment is through the use of the options market. More specifically, taking a look at the implied volatility and implied volatility skew levels of Bank of America options may help determine if investors are bullish, neutral, or bearish.
The implied volatility of Bank of America options is at 36.12 percent today, which coincides with a 76th percentile over the last 30 trading days and 35th percentile over the last 90 trading days. What does this mean? This means that investors or traders are buying a good amount of protection as compared to the last 30 and 90 trading days. The implied volatility skew of March and April put options is about average while call option skew is at a little bullish.
Now, what does this mean? As of Monday, there is an above-average demand from call buyers or below average supply of call sellers while there is an average demand by put buyers or an average demand by put sellers, all neutral to bullish over the next 2 months. Investors are buying up protection but are leaning more neutral to bullish over the next two months.
E = Earnings Are Increasing Quarter-Over-Quarter
A mature bank, such as Bank of America, is difficult to value, but can always be cut down to earnings and revenue growth. These numbers set guidelines for future expectations, which is widely used to value a stock. After all, the stock market thrives on expectations. A large bank has lots of intricacies so these numbers are not as significant as pure growth plays.
More importantly, meeting or exceeding expectations, or how the street feels about the numbers is the key factor. The last eight quarterly yoy earnings growth numbers for Bank of America have all been negative, while the last eight quarterly yoy revenue growth figures for the company have varied: -24.64 percent, -27.65 percent, 38.73 percent, -17.56 percent, 4.78 percent, 4.13 percent, -46.18 percent, and -14.38 percent.
How did the street feel about these numbers? Let’s take a look at the last four quarterly earnings announcement reactions in order to gauge investor sentiment on Bank of America’s stock. The last four quarters have seen next trading session returns of -4.24 percent, -0.21 percent, -4.93 percent, and -1.68 percent. It is clear that the markets are not happy with any of the numbers that this company is posting.
E = Excellent Relative Performance Versus Peers and Sector
Bank of America’s relative to performance to its industry and peers can let us know if it is a leader in its industry. As of today, Bank of America is returning -5.03 percent year-to-date. In contrast, its peers, JP Morgan (NYSE:JPM), Wells Fargo (NYSE:WFC), Citigroup (NYSE:C), and industry are returning 9.36 percent, 2.11 percent, 3.59 percent, and 5.04 percent respectively. So, Bank of America stock has been a dog relative to its closest competitors.
Bank of America is suffering in an industry that is beginning to recover. It has the resources to turn things around, but it may take some time. On the price chart, Bank of America is in a long term downtrend but may indeed see a pop towards $15. The moving averages are signaling a strong uptrend in the short term, but one must be wary of overhead resistance. The options market are buying protection, but investors seem to be taking a neutral to bullish stance. Lastly, Bank of America is strongly underperforming compared to its competitors year-to-date. So, WAIT AND SEE what Bank of America has to offer.
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