Bank stocks have been red hot lately and that goes for Bank of America (NYSE:BAC) too. Every time these stocks get moving though, it seems like the rallies get cut short. This time, however, many have broken through long-term resistance, while some have gone on to hit new multi-year highs, including BAC stock.
But when there’s a massive burst of bullish momentum, investors never want to be the last one on board ahead of a pullback. The rally in financials has been big, and that means they need to cool. The question now becomes, what kind of correction will we get?
For Bank of America stock specifically, will the stock correct through time or through price? If it’s the former, BAC will largely consolidate its recent gains as it trades sideways. In the case of the latter, the correction will come via lower prices.
JPMorgan (NYSE:JPM), Citigroup (NYSE:C), Goldman Sachs (NYSE:GS) and others have also enjoyed a very profitable run lately. They too face a similar question.
Trouble Sizing Up the Banks
Here’s where I have trouble with bank stocks. Many have decent growth projections, while almost all of them command low valuations and pay solid dividends.
But the bank stocks — no matter what kind of quarter they turn in or how much they raise their capital returns each June — just don’t get much love. While it’s easy to look back at them in hindsight (as they’re now near new highs) and say patient investors get the reward, consider that many of them went nowhere for quite some time.
BAC stock hit a dividend-adjusted high of $32.02 in Q1 2018. Unadjusted, that high is at $33.05. Now, at $32.70 almost 20 months later, it’s hard to argue that sitting through the doldrums was worth it.
But here’s the trouble I have with the banks: trust.
Even after a powerful run, many are hesitant to sell thanks to the fundamental elements of the companies. That is, the dividends, valuation and growth. But can we trust that the stocks will continue higher, despite years of being unloved by Wall Street?
Let’s just say I would feel better about buying back in on a pullback, especially with BAC.
Trading BAC Stock
To be clear, I am not making these points from a position of bitterness. I hollered about buying Bank of America stock down near range support between $26 and $26.50 this summer.
When everyone became yield-curve and interest-rate experts, they all assumed we were heading for a recession. Thus, the banks fell hard. InvestorPlace readers knew better though, scooping up discounts on the way.
After bursting through range resistance between $31 and $32, we’re looking for an opportunity to get back in Bank of America stock. While it feels greedy to ask, a pullback to $31 would be most ideal.
The ideal setup doesn’t always pan out, so we need to stay flexible. But BAC returning to long-term range resistance and holding it as support would be a huge signal to the market that the bulls are back in control.
In Q1 2018, the $31.75 to $32 area was the exhaustion point for BAC stock’s rally. On a pullback, that could become a support level too. It may tempt in some bulls who don’t want to risk missing out on further upside should a dip back to $31 fail to develop.
If the stock starts to consolidate in a sideways pattern, my plan will change. But for now, I am looking for a pullback to buy BAC, which is similar to my view for the SPDR S&P 500 ETF (NYSEARCA:SPY).
Valuing Bank of America Stock
While revenue forecasts call for flat growth this year and a 50 basis point decline in 2020, earnings growth is steady. In 2019, analysts expect 3.8% growth and in 2020, estimates call for an acceleration up to 9.6% growth.
Remember, we’re talking about a stock that trades at 12 times this year’s earnings after a 29% rally from the lows three months ago. As far as the dividend, BAC dolls out a yield of 2.2%. That’s below many of its peers, but it isn’t horrible in a low-rate environment.
However, at $31 per share, Bank of America stock becomes a bit more attractive. There it trades at just 11.4 times this year’s earnings (and 10.4 times 2020 estimates), while yielding a bit more too.
Some may shrug at that, but at $31 and sitting on former resistance, I like the technical risk/reward. Plus, trading at ~11 times earnings with 9% earnings growth and a 2.35% dividend yield isn’t the worst thing in the world.
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.
