The whole stock market has been under immense pressure, but Bank of America Corporation (NYSE:BAC) has actually been holding up pretty well. On Tuesday before the open, I put in a buy order with a $28 limit price. Meaning that, should Bank of America stock fall to $28 (or lower) my order would go through.
Fortunately for longs (and unfortunately for me), BAC stock only fell to a low of $29.30 on Tuesday. It essentially hit the same level as it did on Monday’s miniature flash crash.
So why is that so disappointing? Because Bank of America stock is so good and I want to be long! There are a number of reasons to be a buyer of BAC, even if you’ve missed the stock’s massive rally over the past year. For the record, I was quite bullish through 2017.
But on Jan. 31, just two days before violent selling engulfed the market, I said investors need to be cautious on the bank. Did its fundamentals suddenly erode? Did its secular bullish themes suddenly fade away?
No. In fact, I had already heard the company’s earnings results and felt bullish about its underlying business. However, Bank of America stock was up about 10% for the month of January after rising roughly 15% in the fourth quarter. The gains were simply too much.
Revaluing BAC Stock
Here’s the thing about BAC stock: it has bullish catalysts and a low valuation. Trading at just 10 times forward earnings, analysts expect 35% earnings growth 2018 and another 14.3% in 2019. Sorry, but that valuation is just too low for that kind of growth.
Forecasts also call for mid-single digit revenue growth in those years, but I don’t really care about that as much. This is an earnings growth play, plain and simple. Further, Bank of America stock pays a 1.5% dividend yield to boot. With fewer regulations, look for BAC to buy back more stock and raise its dividend.
Part of the reason stocks have been falling has been the rise in bond yields. These yields are heating up as interest rates move higher, thanks in part to an uptick in inflation and the economy. This has adverse effects on the market at times. But for Bank of America stock, it’s good.
A strong economy bodes well for a bank for obvious reasons. More lending (typically) equals more profits. But BAC wins in more ways than one. After picking up the Merrill Lynch division during the financial crisis, it has a formidable wealth management division. Second, it has one of the largest depositor bases in the country. Meaning that as the Fed raises interest rates — which it plans to do possibly four times this year — BAC’s bottom line will grow more and more.
BAC stock is dependent on a strong economy and it’s got one right now. That should be a major tailwind in 2018.
Trading Bank of America Stock
It’s a bummer we didn’t get a fill on BAC stock at $28, but maybe over time we will still get it. What’s so great about this level anyway?
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At the present time, $28 is roughly where the 100-day simple moving average rests. After already falling below the 50-day moving average, the 100-day was the next line of defense. Goldman Sachs Group Inc (NYSE:GS), Morgan Stanley (NYSE:MS) and Citigroup Inc (NYSE:C) all tested and held the 100-day moving average.
However, some other strong banks broke the 50-day, but like BAC did not quite fall to the 100-day. Those banks include JPMorgan Chase & Co. (NYSE:JPM) and KeyCorp (NYSE:KEY).
For BAC, $28 is more than just the 100-day moving average. This area was resistance in late October and early November. In December, when it finally broke over $28, it buoyed Bank of America stock as support before it began racing higher into the $30s.
Ultimately, I think $28 would be excellent support if the stock sees it. Although the averages ended Tuesday with a vicious rebound, we will have to see what the rest of the week brings us. BAC stock is a great company and should do well in 2018.
Hopefully, we get another shot below $29 to grab some stock.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell did not hold a position in any of the aforementioned securities.
