This market rally has been built on a series of powerful sector rotations. While the overall market was in bounce mode coming into the first quarter, rotations from tech to industrials to retail to financials has kept individual stocks in check while allowing the overall market to stay afloat with little to no pullback. Bank of America (NYSE:BAC) is one of those stocks. We’ve had several pullbacks in BAC stock, but now the rotation is favoring bank stocks and that’s been a win for BofA investors lately.
Shares were consolidating nicely around $30 a share before climbing higher on Friday. On Monday, BAC stock shot higher and is now flirting with another potential breakout. Can we get the shares to run to new highs? It’s certainly possible.
Trading BAC Stock
Above is a daily chart of BAC stock where investors can see the clear breakout. Shares consolidated near $30 before uptrend support gave it a lift higher. This of course came after BAC broke above short-term range resistance at $29.50. We were watching this breakout very closely earlier this month.
Shares are slightly overbought after the move, so it’s not wrong to question whether now is the best time to buy. Further, when we look at a longer-term chart, such as the weekly chart below, there may be some hesitancy near $32.
On the chart above, we can see that this $30.50 to $31 area gave BAC trouble from July through September. Then the fourth-quarter swoon came, knocking BofA and many others significantly lower. Should Bank of America stock hurdle this level though, a move to $32 could be in the cards.
Looking back, $32 held Bank of America in check in Q1 2018, so I would certainly expect this level to act as resistance on its first attempt. That is, assuming it gets there in the first place. Should we lose uptrend support on the daily chart, I want to see the 20-day moving average and the prior consolidation zone at $30 hold as support. If it doesn’t, BAC could drop back into its prior range between $28 and $29.50.
Valuing Bank of America Stock
Earlier this month, Bank of America stock delivered a 4-cent earnings beat when it reported EPS of 70 cents. By and large, the industry reported a solid quarter. However the short-term worry with investment banks isn’t a recession, it’s interest rates.
While a yield inversion could signal a recession is on the way, it has a more-direct impact on BAC, JPMorgan (NYSE:JPM), Goldman Sachs (NYSE:GS) and others. As the yield curve flattens, the spread between long- and short-term rates narrows. That spread represents a level of profitability for bank stocks and thus, it’s a negative for the companies when it shrinks. Investors obviously realize this and sell the banks when the yield curve is threatening to invert, like it flirted with last month.
That said, we’re not talking about expensive stocks here. BAC stock trades at 10.75 times this year’s earnings expectations. Estimates call for earnings of $2.86 per share this year. If achieved, it will represent 9.2% growth from 2018, while estimates call for 9.2% growth in 2020. Both years easily outpace revenue growth estimates, currently at 1.2% and 2.4% for 2019 and 2020, respectively.
BAC is up about ~15% over the past month, giving dip buyers a great cost basis and an excellent cushion against a potential fall. Should they believe the U.S. economy — which just printed Q1 GDP growth of 3.2% vs. expectations of 2.5% — will keep on humming, Bank of America stock may be a worthwhile hold. That’s particularly true with its 2.2% dividend yield. Another alternative would be JPMorgan, a high-quality company with a superior yield.