Is Bank of America a Risky Investment?

With shares of Bank of America (NYSE:BAC) trading around $16, is BAC an OUTPERFORM, WAIT AND SEE, or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

T = Trends for a Stock’s Movement

Bank of America is a financial institution serving individual consumers, small- and middle-market businesses, corporations, and governments with a range of banking, investing, asset management, and other financial and risk management products and services. With its banking and various non-banking subsidiaries throughout the United States and international markets, the company provides a range of banking and non-banking financial services and products through several business segments: consumer and business banking, consumer real estate services, global banking, global markets, global wealth, investment management, and other.

The Consumer Financial Protection Bureau has ordered Bank of America to pay $727 million to customers who were duped by the bank’s illegal credit card marketing and billing practices. Roughly 1.9 million Bank of America customers were illegally charged for add-on products like credit monitoring and credit reporting services that they didn’t actually receive, the CFPB said Wednesday. These customers will receive refunds amounting to $459 million.

Another 1.4 million customers were victims of deceptive marketing practices that led them to sign up for products like credit protection services that weren’t what they thought they were. These people will receive refunds totaling $268 million. In addition to the refunds it will pay customers, Bank of America and its subsidiary, FIA Card Services, will also be required to pay a $20 million penalty to the CFPB. Separately, the Office of the Comptroller of the Currency is fining the bank $25 million.

T = Technicals on the Stock Chart Are Mixed

Bank of America stock has been flying higher in recent quarters. However, the stock is currently trading sideways and may need time to consolidate before heading higher. Analyzing the price trend and its strength can be done using key simple moving averages. What are the key moving averages? The 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages. As seen in the daily price chart below, Bank of America is trading between its rising key averages, which signals neutral price action in the near-term.

BAC

Source: Thinkorswim

Taking a look at the implied volatility (red) and implied volatility skew levels of Bank of America options may help determine if investors are bullish, neutral, or bearish.

Implied Volatility (IV)

30-Day IV Percentile

90-Day IV Percentile

Bank of America options

28.40%

83%

80%

What does this mean? This means that investors or traders are buying a very significant amount of call and put options contracts as compared to the last 30 and 90 trading days.

Put IV Skew

Call IV Skew

May Options

Average

Average

June Options

Average

Average

As of Thursday, there is average demand from call and put buyers or sellers, all neutral over the next two months. To summarize, investors are buying a very significant amount of call and put option contracts and are leaning neutral over the next two months.

On the next page, let’s take a look at the earnings and revenue growth rates and the conclusion.

E = Earnings Are Increasing Quarter-Over-Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. Also, the last four quarterly earnings announcement reactions help gauge investor sentiment on Bank of America’s stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for Bank of America look like and more importantly, how did the markets like these numbers?

2013 Q4

2013 Q3

2013 Q2

2013 Q1

Earnings Growth (Y-O-Y)

866.67%

20%

68.42%

233.3%

Revenue Growth (Y-O-Y)

364.48%

-1.52%

3.46%

4.13%

Earnings Reaction

2.26%

2.24%

2.8%

-4.72%

Bank of America has seen increasing earnings and revenue figures over the last four quarters. From these numbers, the markets have had conflicting feelings about Bank of America’s recent earnings announcements.

P = Excellent Relative Performance Versus Peers and Sector

How has Bank of America stock done relative to its peers – JPMorgan Chase (NYSE:JPM), Wells Fargo (NYSE:WFC), and Citigroup (NYSE:C) — and sector?

Bank of America

JPMorgan Chase

Wells Fargo

Citigroup

Sector

Year-to-Date Return

4.59%

-0.22%

6.7%

-10.5%

1.14%

Bank of America has been a relative performance leader, year-to-date.

Conclusion

Bank of America is a bank and financial services giant that operates in a recovering financial industry, the backbone of the United States economy. The Consumer Financial Protection Bureau has ordered Bank of America to pay $727 million to customers who were duped by the bank’s illegal credit card marketing and billing practices. The stock has been exploding to the upside in recent quarters but is currently trading sideways. Over the last four quarters, earnings and revenue figures have been have been increasing. However, investors have had conflicting feelings about recent earnings announcements. Relative to its peers and sector, Bank of America has been a year-to-date performance leader. Look for Bank of America to OUTPERFORM.

Using a solid investing framework such as this can help improve your stock-picking skills. Don’t waste another minute — click here and get our CHEAT SHEET stock picks now.

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