Is Bank of America an Attractive 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.

Bank of America is increasing salaries for some managing directors at its investment bank in the European Union by about 20 percent to $500,000, according to a person with knowledge of the plan. The raise in base pay for client-facing managing directors is effective immediately and comes amid tougher EU rules on bonuses in the region, said the person, who asked not to be identified because the details are private. European regulators are preparing to outlaw bonuses that are more than twice fixed pay to prevent a repeat of the risk-taking that helped spark the 2008 global financial crisis. Banks are looking for ways to sidestep the stricter EU bonus rules on compensation, which will apply to awards given in 2015, based on this year’s performance.

T = Technicals on the Stock Chart Are Strong

Bank of America stock has been flying higher in recent quarters. The stock is currently trading near highs for the year and looks set to continue this path. 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 above its rising key averages which signal neutral to bullish 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

29.96%

93%

90%

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

March Options

Flat

Average

April Options

Flat

Average

As of today, there is an average demand from call buyers or sellers and low demand by put buyers or high demand by put sellers, all neutral to bullish over the next two months. To summarize, investors are buying a very significant amount of call and put option contracts and are leaning neutral to bullish 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%

20.00%

68.42%

233.30%

Revenue Growth (Y-O-Y)

364.48%

-1.52%

3.46%

4.13%

Earnings Reaction

2.26%

2.24%

2.80%

-4.72%

Bank of America has seen increasing earnings and revenue figures over the last four quarters. From these numbers, the markets have been pleased with 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), Citigroup (NYSE:C), and sector?

Bank of America

JPMorgan Chase

Wells Fargo

Citigroup

Sector

Year-to-Date Return

6.81%

-6.50%

-1.35%

-10.40%

-1.86%

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 company is increasing salaries for some managing directors at its investment bank in the European Union by about 20 percent to $500,000. The stock has been exploding to the upside in recent quarters and is currently trading near highs for the year. Over the last four quarters, earnings and revenue figures have been have been increasing, which has left investors pleased 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.

More From Wall St. Cheat Sheet:

More from The Cheat Sheet