On Monday, Bank of America Corp (NYSE:BAC) reported fiscal first-quarter results. The banking giant beat on both earnings per share and revenue expectations. Despite the good results, BAC stock was down in early Monday trading before rallying about 1% in the afternoon.
So what gives?
Unfortunately for bullish investors, the reaction by Bank of America stock isn’t much of a surprise. It follows the same pattern — top- and bottom-line beat, followed by a stock-price decline — as JPMorgan Chase & Co. (NYSE:JPM), Citigroup Inc (NYSE:C) and Wells Fargo & Co (NYSE:WFC).
The price action creates a quandary to many investors, given the fundamental backdrop the banks are operating within. Interest rates are on the rise, allowing the banks to pocket billions more in profit on an annual basis. The economy is good, growth is strong and the valuations are downright cheap.
The lack of enthusiasm following the results is surprising. One reason could be the fear of an inverting bond spread. I touched on this fear recently with JPMorgan. Despite JPM’s great earnings results, shares turned lower too.
As the yield spread between between long-term Treasuries and short-term Treasuries continues to shrink, many fear what this could be trying to tell us. Bears will say that it means we could be approaching a recession. The 10-year and 2-year Treasury yield spreads and the 30-year and 5-year yield spreads are at their lowest levels since 2007, the time of the financial crisis. Coupled with the Federal Reserve decreasing its balance sheet, the economy could be on shaky ground.
Bulls, on the other hand, have a simple explanation. Following the Great Recession, the Fed was forced to cut interest rates down to zero in hopes of spurring economic growth. Now that the economy is chugging along with encouragement, we need to “normalize” these interest rates and raise them. That — the bulls say — is inflating the yield on short-term bonds while having less of an effect on long-term Treasuries.
The Quarter and Year for BAC
That all seems complicated and under the radar to many investors. But it’s a serious concern being talked about on Wall Street. How it relates to BAC stock specifically is outside of my scope, though. Meaning that, if a recession were looming on the horizon, which I don’t believe to be the case for 2018, then why wouldn’t more stocks be under pressure? Why just the banks? Any cyclical business would be at risk, as would the market as a whole.
When I look at BAC stock, it doesn’t scream “sell!” If anything, I want to find a spot to buy the bank.
In the quarter, revenue grew 3.8% year over year (YoY), while earnings per share of 62 cents came in 3 cents per share ahead of expectations. While revenue growth was just okay, earnings jumped almost 40% YoY. That’s tremendous growth and not just a one-time boost.
Analysts see the company’s fiscal first quarter playing out for the whole year. Meaning that they expect 3.8% revenue growth in 2018 and full-year earnings growth of 36%. That’s darn impressive; and 2019 shouldn’t be weak either. Short of a recession, analysts are looking for sales growth to accelerate to 4.1% and for earnings to grow another 14%.
It leaves BAC stock trading at a paltry 11.8 times 2018 earnings and at just 10.4 times 2019 estimates. While not massive, it’s also worth noting that Bank of America stock has a 1.6% dividend yield too. How can shares sell at such a discount given this growth rate and strong backdrop?
That’s one reason why, like JPM, I think shares should be heading higher, not lower, on earnings.
Trading Bank of America Stock
Support at $29 has been quite strong, despite there being no obvious reason as to why — at least when looking at the charts that is. Still, though, this level held up during panic selling in the S&P 500 in February, as well as further trade-war selling in March. It’s still holding above this level post-earnings.
Click to Enlarge
This leads me to believe that BAC stock will stay above these levels. Below $29 and I would become much more concerned. It would also be more encouraging to see Bank of America back above its 50-day and 100-day moving averages. If so, it puts a retest of the $32.50 breakout we were watching last month back in play.
Keep in mind Goldman Sachs Group Inc (NYSE:GS) reports earnings on Tuesday, while Morgan Stanley (NYSE:MS) reports earnings on Wednesday.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell held a position in JPM.
