Welcome to the Stock of the Day.
U.S. financial giant Bank of America (BAC) has been on the up-and-up lately, having risen over 20% in the past quarter alone. With its next earnings release coming up, is now the time to revise my long-standing bearishness against banks?
Let’s find out by starting with BAC.
Headquartered in Charlotte, North Carolina, Bank of America is the second largest bank in the country. Bank of America’s claim to fame is that it has a working relationship with nearly every single Fortune 500 company (99%) and it operates 5,600 branches across 150 countries (and about three times that number in ATMs).
It’s no secret that Bank of America goes head to head with financial industry titans like Citigroup (C), JPMorgan (JPM) and Wells Fargo (WFC). Of these four companies, Wells Fargo shares are the best buy right now—WFC earns a B for its Quantitative Grade and a C for its Fundamental Grade.
Meanwhile, Bank of America and JPMorgan shares are both C-rated holds and Citigroup shares are an outright sell. But as I’ll discuss shortly, each of these banks is struggling to grow sales so return on equity is suffering industry-wide. So I’m staying away from the big banks in my advisory services. If you really want to get involved with the financial sector, I recommend you look into small asset classes—like my three top-rated financial services companies here.
Bank of America is scheduled to announce Q4 2013 results before the opening bell next Wednesday, January 15. Unfortunately, there isn’t much to look forward to. Right now, analysts expect sales to drop 1.7% compared with Q3 2012. And while Bank of America is headed towards triple-digit bottom-line growth, that’s mostly because the company has been cutting costs rather than growing revenue.
In any event, the analyst community cut this quarter’s consensus EPS estimate by 4% recently, indicating that the company could underperform expectations. So I wouldn’t hold my breath on a blowout earnings announcement.
Before you buy any stock, you should always run it through my free Portfolio Grader ratings system. Over the past year this conservative-ranked stock has been fluctuating between buy and hold territory. That’s mostly due to changes in buying pressure—which gives an indication of the stock’s risk-to-return ratio.
Currently, BAC earns a C for its Quantitative Grade (indicating mediocre buying pressure) so the stock is a hold overall. On the fundamentals side, Bank of America has managed to firm up its operating margin growth, earnings momentum and cash flow over the past few quarters (all A-rated).
Meanwhile, the company needs to work on sales growth, analyst earnings revisions and return on equity (all D-rated). BAC receives a B for its Fundamental Grade.
Bottom Line: As of this posting I consider BAC a C-rated Hold.