Bank of New York Mellon (NYSE:BK) stock investors have not had a great 2018 so far; however, they may still consider adding BK to their portfolio for the rest of the year. Specifically, there are three bullish plays in BK stock that I want to share with you, as each play could lead to impressive profits.
Year-to-date, Bank of New York Mellon shares are down almost 3%, mostly due to management’s mixed messages at quarterly calls and the slow rate of revenue growth in its investment management business. During the most recent earnings call of July 19, CEO Charles Scharf asked for more patience from BK stock investors while the company took steps to increase BK’s organic growth without relying only on a rising stock market and increasing interest rates.
Yet believers in the Bank of New York Mellon stock highlight the foresight of management in investing in technology, aiming to grow the customer and revenue base of the bank, and saving costs as well as BK’s expected robust earnings growth. Bank of New York also has a lower debt level relative to the industry average. In general, a debt-to-equity ratio of 1.5 or lower is regarded as good, and BK’s ratio currently stands at less than 0.8. Several of BK’s competitors include Bank of America (NYSE:BAC), Capital One Financial (NYSE:COF), Goldman Sachs (NYSE:GS) and Wells Fargo (NYSE:WFC).
In July, BK declared a quarterly common stock dividend of 28 cents per share, payable on Aug. 10, 2018, to shareholders of record on July 31, 2018. The next quarterly dividend declaration is expected in October with a dividend yield of around 2%.
The Bank of New York Mellon stock price has stabilized since mid-August. Those investors who pay attention to moving averages should note that the technical message has improved to a “buy,” while oscillators are giving a wider range of “neutral-to-buy” readings. Short-term support for BK is ﬁrst at $51.3 and then at 50; meanwhile, short-term resistance in Bank of New York Mellon stock is ﬁrst at $52.2 and then at $53.6. BK’s 52-week price range has been $49.39 (Apr. 2, 2018) — $ 58.99 (Jan. 16, 2018).
If you are also of the opinion that the executive management is going to improve its balance sheet further and that Bank of New York Mellon stock is ready for a rebound on either technical and fundamental grounds, you may want to add BK to your portfolio this September or early October. Depending on individual portfolio allocations and risk/return profiles, here are the three types of trades set up for BK stock (prices are based on Bank of New York Mellon stock’s closing price of $51.92 on Sept. 26):
Three Bullish Strategies on Bank of New York Mellon Stock
1. Buy 100 shares of Bank of New York Mellon stock at a limit price of $51.92. You should expect to hold this long stock position for up to one to six months for an approximate 6-8% gain. You may consider placing a stop loss at about 3% below your entry point.
2. Use a covered call whereby you would buy 100 shares of Bank of New York Mellon at a limit price of $51.92 and, at the same time, sell a BK Jan 2019 $50 call option, which currently trades at $3.81. The $50 option is slightly in-the-money (ITM), offering more downside protection in case of volatility and a decline in BK stock.
This call option would stop trading on Jan. 18, 2019 and expire on Jan. 19.
Assuming you would enter this covered call trade at the closing prices on Wednesday, Sept. 26, at expiry, this trade would break even at a Bank of New York Mellon stock price of $48.1 and the maximum return would be $190 at a price of $50 at expiry (excluding trading commissions and costs).
This put option would also stop trading on Jan. 18, 2019 and expire on Jan. 19.
Assuming you would enter this put selling strategy at the closing prices on Wednesday, the upside is that you keep the premium as long as Bank of New York Mellon stock closes above $50 when January options expire (excluding trading commissions and costs).
The downside is that if BK stock trades below $50 ahead of expiration, you could be assigned 100 shares for each sold put at a cost of $50 per share.
At expiry, this trade would breakeven at a BK stock price of $48.45.
The Bottom Line on BK Stock
I believe a rebound in Bank of New York Mellon stock is coming. However, as prudent investors, it is always crucial to maintain a clear risk/return profile. Thus, if the rebound does not happen, a test of the previous lows and toward the mid-$40’s level could be the next leg down.
As of this writing, Tezcan Gecgil did not hold a position in any of the aforementioned securities.