Earlier this week, a breakout seemed imminent in Bank of America Corp (NYSE:BAC). Unfortunately, though, Bank of America stock hasn’t been able to push through current resistance. It doesn’t help that the S&P 500 has been struggling since an impressive bounce from its February lows.
So what should we do with BAC stock?
Put simply, Bank of America stock is one we want to stay long. It might not pay off over the next few weeks or even months, but short of a major market correction, this stock is only heading higher.
The reason why is rather simple. While the market is busy reacting negatively to the Congressional testimony from Federal Reserve chairman Jerome Powell, his reiteration of the Fed’s commitment to higher interest rates is a huge win for banks.
In fact, it’s a huge win for Bank of America specifically, given its massive base of customer deposits. As interest rates go higher, the bank is able to make more money on these deposits. This is essentially risk-free profit that drops right to its bottom line.
Further, higher rates signal a recovery in the economy along with confidence in that recovery continuing. A strong economy is even more important for the banks than higher rates. In short, it means more loaning, banking and borrowing. That’s great for business!
Valuing Bank of America Stock
I think perhaps the best thing about Bank of America stock is its valuation. Despite BAC stock rallying from $25 in October to $31.50 now, it’s still not that expensive. Get this: The stock trades at just 12.6 times 2018 earnings estimates. Shares trade at just 11 times 2019 earnings estimates.
To get a valuation this low, we usually have a stock with little to no growth. But that’s not the case with BAC either. Analysts expect 3.5% revenue growth this year and another 4.3% growth in 2019.
It’s unclear whether the market’s recent bout of volatility will help BAC. Either way, several pros are expecting 2018 to be more volatile than 2017, and that’s good for investment banks.
When it comes to earnings, analysts are looking for robust growth in 2018. Forecasts call for roughly 36% earnings growth this year, with another 14% growth in 2019. Even with little growth, the valuation here is attractive. Throw in positive revenue growth, expanding margins and 36% earnings growth, and it makes Bank of America stock a screaming buy.
The stock finally trades at a premium to its book value, but given its growth, BAC deserves to. Also worth noting is the company’s 1.5% dividend yield. This figure — along with the company’s buyback program — is sure to increase later this year too.
After a 400% boost to its dividend in 2014, management didn’t raise its payout in 2015. For each of the last two years, though, management has raised the dividend by 50% or more.
There’s reason for investors to be confident in the company’s capital return plans.
Trading Bank of America Stock
With the valuation picture clearly checking out, investors may be wondering how to play the stock. When the flash crash hit stocks a few years ago, I sat there — part fascinated, part terrified — and unable to move. Luckily I didn’t sell anything, but I wasn’t pulling the buy trigger, either.
I was far more prepared during last month’s meltdown, having prepped a number of buy orders the night before. While we did nab some good positions, most of my limit orders were a hair too low — they were good, but not good enough. BAC stock was one of those orders, with a buy order set for $28.
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Missed your chance too, huh? Here’s what we can do next.
Both trend-line support (in black) and the 50-day moving average are just below current prices. Investors can consider buying near those levels, around $31. I also like JPMorgan Chase & Co. (NYSE:JPM), which is a phenomenal company. Like Bank of America stock, its breakout didn’t work out either.
I would be a buyer of BAC stock at $31 and basically add to it on any significant declines below that. From there, we’ll aim for another breakout attempt over $32.50. The valuation is too low, the operating environment is too good, and the economy is not entering a recession. There’s a lot to like here.
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.
