Bank of America Corp (NYSE:BAC) and frankly, all of the big banks, have been struggling to push higher. That’s despite the companies reporting relatively robust earnings just a few weeks ag0. In Bank of America’s case, the company beat on earnings per share and revenue estimates. Yet, BAC stock fell.
So, what gives?
Because of the recent stock market drama and worries over a potential inflection between short- and long-term bonds, many investors were selling the banks despite strong earnings. It wasn’t just Bank of America stock either. Investors were putting JPMorgan Chase & Co. (NYSE:JPM), Goldman Sachs Group Inc (NYSE:GS), Morgan Stanley (NYSE:MS) and Citigroup Inc (NYSE:C) back on the shelf as well.
However, with the rebound in the stock market on Friday and Monday, some investors would have thought these stocks would be rallying, not stagnating. The frustrating price action could resolve higher, though, and in the case of BAC stock, here’s why.
Higher Rates and Higher Volatility
While the Federal Reserve didn’t raise interest rates in its most recent meeting, this doesn’t mean more rate hikes aren’t coming. Whether it’s three total hikes this year or four doesn’t matter a whole lot. What does matter is the trend and when it comes to interest rates — and that’s higher.
Banks are using these higher interest rates to earn more money on their customers’ deposits — without passing on much of a higher rate to them. In the end, the banks are getting a bump to their net interest margins, which is fancy talk for saying they are becoming more profitable. In this case, it’s happening without more risk.
Second, higher volatility also bodes well for Bank of America. While that volatility may make it harder to own BAC stock, it does wonders for its trading-desk revenues. Trading revenue was a huge drag for the banks in 2017, thanks to the historically low volatility. 2018 is a different year and with the blowup of the short-volatility/long-equities trade disintegrating thousands of portfolios and several ETNs, it’s safe to say it will remain a more volatile year.
Valuation and Growth
Higher rates and volatility wouldn’t matter if BAC’s underlying business was doing poorly. Thankfully, that’s not the case. The economists at Goldman Sachs recently said there’s almost no chance of a recession in 2018, while continuation of economic expansion bodes well for investment banks.
From the analysts’ perspective, they expect BAC’s earnings to expand almost 40% this year and grow another 13% in 2019. Revenue estimates only call for 4.3% growth in 2018 and 4.8% growth in 2019. Still, that earnings growth is very impressive.
At current prices, BAC stock trades at just 11.4 times 2018 earnings and about 10 times next year’s earnings. While not massive, it’s also worth mentioning that Bank of America stock also has a 1.6% dividend yield.
Wait, BAC is forecast to grow earnings almost 40% this year and trades at less than 12 times earnings?
It doesn’t make a lot of sense to me either, but that’s what we’re dealing with. The valuation alone should limit the downside in BAC stock provided the U.S. doesn’t enter a recession — which is quite unlikely at this point.
Trading BAC Stock
Those are my three reasons for a higher BAC stock price: Higher rates and volatility, strong growth and a low valuation. But what do the charts say?
Click to Enlarge
Despite all the positive catalysts that the banks have, BAC stock hasn’t been trading that well. A false breakout in March has been followed by disappointing price action. The 50-day moving average is crossing below the 100-day moving average, which shows that momentum is waning for the bulls. Earlier this month, $29 support momentarily gave way and there’s a stiff downtrend line of resistance (in black).
So, what do the bulls need? First, they need support to hold, whether that comes at $29 or the 200-day moving average. Second, they need to see BAC stock push through that downtrend line of resistance. Above those levels, it will give BAC a chance to retest the 50-day and 100-day moving averages, before having a shot at its prior highs.
A move to $30 will give bulls some form of momentum. We’ll have to see how long it lasts, though.
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.
