A little over a year ago I took a bullish stance on Bank of America Corp (NYSE:BAC) and have reiterated that opinion more than once in the meantime. In short, yours truly here felt that years of belt-tightening and a some stress-test flops had made BofA a lean, mean banking machine. Fanning the bullish flames for BAC stock was a looming backdrop of rising interest rates.
Since that early-September-2016 call, BAC shares have rallied 65%; you’ll get no complaints from me. Thing is, as fruitful as this suggestion has been thus far, they may be on the verge of getting a whole lot better. Two charts say why.
A Tailwind Is (Finally) Blowing
Just for the record, here’s my first definitive look at Bank of America, from September 2nd of last year. I followed up here and here, and a few other times as well. Clearly I’m a fan.
More important though, you may want to become a fan sooner than later as well.
There are a couple of things going on that work in favor of BAC here, both of which can be plotted on a chart. The first of these is the Federal Reserve’s so-called “dot plot” of forecasted interest rate increases.
In mid-September traders were given a dose of news they weren’t quite sure what to do with. Rather than the next rate hike coming in March of next year, it’s now projected to materialize in December. The general consensus is, the economy is heating up a little faster than initially suspected, and the Fed is feeling pressed to tap the brakes before inflation soars out of control.
It’s not the next increase in interest rates that bode so well for BAC stock, however. It’s the six other quarter-point rate hikes projected by the end of 2020.
See, usually once the interest rate ball gets rolling, it remains in motion. This week’s surprising upward revision in Q2’s GDP growth rate to 3.1% underscores just how quickly and unexpectedly growth kicked in again.
Higher interest rates generally translate into higher earnings on bank loans, as lenders charge more without the cost of that capital necessarily costing banks more. Though this is clearly a “long game,” for newcomers to BAC stock, it’s a long game worth playing.
Ready for Launch
That being said, newcomers might not have to wait too terribly long to start reaping some sort of reward.
While BAC may be up 65% since early September, it really hasn’t made any net progress since February of this year. Instead, it’s just been edging sideways in something of a sideways trading range. A closer inspection of the weekly chart of BAC stock below, though, makes it clear the stock is working on wiggling its way out of that range in a bullish direction. In fact, it already has. With the recent runup, the technical ceiling at $25.40 has been further weakened.
In retrospect, the sideways action since early this year may have just been a consolidation phase, setting the stage for a breakout thrust that may have just gotten underway.
Looking Ahead for BAC Stock
As for targets, that’s tougher to pinpoint right now. The forward-looking P/E of 11.8 leaves some room for more upside, though it’s likely the earnings estimates that lead to that projected P/E underestimate how well Bank of America will do next year.
Regardless, this is a long-term idea, with rate hikes in the cards through 2020. It’s just too soon to peg a meaningful price target for BofA. As long as rates continue to rise, Bank of America should do increasingly better. The best way to play it may just be latching on here and riding out all the ebbs and flows until the end of the economic growth phase. Experts remain anything but sure about when that might happen.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter.
