Is Bank of America a Buy After Recent News?

With shares of Bank of America (NYSE:BAC) trading around $14, 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 facing up to $864 million in penalties from the U.S. government related to a mortgage program called Hustle run by Bank of America subsidiary Countrywide. A jury found that Countrywide committed fraud with the program, which ran between August 2007 and April 2008 and sold loans to Frannie Mae and Freddie Mac. According to the government’s court filing, seen by the Wall Street Journal, the government is asking Bank of America to pay the maximum possible penalty, which the government believes reflects the losses Frannie Mae and Freddie Mac faced from the Hustle loans.

T = Technicals on the Stock Chart Are Strong

Bank of America stock has been flying higher in recent quarters. The stock is currently trading sideways as it digests gains from a recent run, so it may need time to stabilize. 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

19.95%

3%

0%

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

Put IV Skew

Call IV Skew

December Options

Flat

Average

January 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 small 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 Mixed 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 Q3

2013 Q2

2013 Q1

2012 Q4

Earnings Growth (Y-O-Y)

20.00%

68.42%

233.30%

-77.15%

Revenue Growth (Y-O-Y)

-1.52%

3.46%

4.13%

-25.02%

Earnings Reaction

2.24%

2.80%

-4.72%

-4.24%

Bank of America has seen increasing earnings and mixed 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 = Average 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

24.03%

22.86%

25.22%

26.77%

25.72%

Bank of America has been an average performer, 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 facing up to $864 million in penalties from the U.S. government related to a mortgage program called Hustle run by Bank of America subsidiary Countrywide. The stock has been exploding to the upside in recent quarters and is now consolidating near highs for the year. Over the last four quarters, earnings have been rising while revenues have been mixed, which have produced conflicting feelings among investors about earnings announcements. Relative to its peers and sector, Bank of America has been a year-to-date performance leader. WAIT AND SEE what Bank of America does this quarter.

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.