Bank of America Corp (NYSE:BAC) is down more than 13% from its 52-week high of $25.80. Despite how well the financial sector has done since the election, BAC stock is only up 2.4% on the year. Given this performance, it might be easy for investors to forget it is still up more than 40% over the last six months.
So BofA is still up big, but it’s off the highs and has consolidated, really, since early December. Does that mean it’s time for investors to step in and buy?
Perhaps, but some things need to go right for BAC stock. Remember back when “bad news was good news?” Meaning, bad economic news would keep the Federal Reserve from raising interest rates. The “lower for longer” mantra meant easy money and cheap borrowing.
In November though, that all changed. Donald Trump was elected president, bringing hope and optimism that the economy would be stronger. Suddenly, investors wanted higher interest rates because that meant the economy was doing better.
Where Are We With BAC Stock?
Bank of America stock catapulted higher after the election for a few reasons. Expectations for higher rates would boost the bottom line, while higher trading revenues would jolt top-line figures. Finally, a faster growing economy would be good for its business. Helping matters was the fact that BAC stock had a low valuation — like virtually all bank stocks.
BofA still trades with a low valuation, but not as low as it had been pre-election. In September, BAC stock was trading with a price-to-book value of 0.65. In March, that figure climbed north of 1.00 and is currently just below 0.95. P/B measures the stock price against the company’s book value, or in this case, the value of BofA’s assets. For years, these low P/B ratios had investors buying bank stocks, knowing that one day the value would be realized. It’s nice buying properties and assets trading at a discount. But that is no longer the case — at least on a P/B basis.
BAC stock is still cheap when it comes to earnings though. Trading at just 15 times last year’s results and 10.5 forward earnings, the stock is far from expensive. But there is a caveat: catalysts.
Two keys for Bank of America stock are an improving economy and higher interest rates. The latter is dependent on the former coming to fruition. Recent economic data hasn’t been robust, while the March jobs report was quite disappointing. It doesn’t help that Q1 GDP estimates were also lowered.
These facts seem to validate the Fed’s cautious approach to raising interest rates. After raising rates in March, some investors are calling for as many as three more this year. However, the Fed will likely aim for three total hikes this year at most, should the economy fail to accelerate meaningfully.
How to Trade BofA
While the situation seems less than rosy, remember just how strong this sector has been. It very well could turn out that these catalysts pan out and bank stocks head higher. Last month we looked at three bank stocks to buy on the dip. BAC stock had two notable levels of support: the 100-day moving average and $22.
Since that time, the 100-day level has failed as support, but $22 is holding. Should that level fail, a decline toward $20 could be in the cards. Active investors can consider buying the stock now, while using $22 as their stop-loss. Conservative investors could either buy now and add to the position on a decline to $20-and-change, or wait for a pullback to the latter level before initiating a new position.
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One thing to note is earnings. The company reports on Tuesday morning. This could either propel BAC stock higher or pressure it lower.
Of its peers — JPMorgan Chase & Co. (NYSE:JPM), Wells Fargo & Co (NYSE:WFC) and Citigroup Inc (NYSE:C) — none have given a good indication as to what BofA will do post-earnings.
I usually like to wait and see what happens before making a move. In this case, BAC stock is no different. Either $22 will hold post-earnings and investors can buy with confidence, or that support will fail and lower prices will be coming.
As of this writing, Bret Kenwell did not hold a position in any of the aforementioned securities.
