Will Recent News Hurt Bank of America’s Stock?

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.

According to regulatory filings made with the U.S. Securities and Exchange Commission (SEC), Bank of America is the latest bank drawn into the evolving Forex probe into some of the world’s largest dealers over alleged foreign exchange rate manipulation. The growing FX probe that has been the subject of a number of lawsuits seeking class action status, as global regulators continues to investigate, is thus expanded to now include 8 banks or a total of 11 entities that have made such disclosures that they are being probed under the ongoing globally scoping case. The news was revealed in a Form 10K Annual Report filing by Bank of America Corporation for its 2013 full-year. Bank of America Corporation is the Delaware entity that represents the brand’s group of companies, including Merrill Lynch, and a vast number of direct and indirect subsidiaries, with some 242,000 full-time employees as of December 2013, according to the nearly 500 page filing that reviewed metrics and material events for its 2013 full-year results.

Bank of America described in the filing signed by its CEO, Brian T. Moynihan, that, “Government authorities in North America, Europe, and Asia are conducting investigations and making inquiries of a significant number of FX market participants, including the [Bank of America] Corporation, regarding conduct and practices in certain FX markets over multiple years. The Corporation is cooperating with these investigations and inquiries.”

T = Technicals on the Stock Chart Are Strong

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 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

26.17%

56%

53%

What does this mean? This means that investors or traders are buying a 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 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 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), Citigroup (NYSE:C), and sector?

Bank of America

JPMorgan Chase

Wells Fargo

Citigroup

Sector

Year-to-Date Return

4.72%

-2.83%

1.72%

-7.05%

-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 the latest bank drawn into the evolving Forex probe into some of the world’s largest dealers over alleged foreign exchange rate manipulation. 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.

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