Where Will Bank of America Go Next?

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 Corp. fell the most in a year after suspending a dividend increase and $4 billion of planned share repurchases because of an error in its stress-test submission to the Federal Reserve. Bank of America will resubmit its proposal, the Charlotte, North Carolina-based lender said today in a statement. The company said it incorrectly adjusted for cumulative realized losses on structured notes issued by Merrill Lynch. Chief Executive Officer Brian T. Moynihan had planned on boosting the bank’s quarterly payout to 5 cents a share from 1 cent, five years after the firm cut the dividend to a token amount during the financial crisis. Bank of America said today its revised proposal will probably feature lower payouts than in its original plan. “Bank of America is by far not the first big bank to make a mistake in its CCAR submission,” David Hilder, an analyst at Drexel Hamilton LLC in New York, said in a phone interview, referring to the Fed’s Comprehensive Capital Analysis and Review. He said that while Bank of America noticed the error and probably has sufficient capital for the payout, the setback is “embarrassing” for the company.

T = Technicals on the Stock Chart Are Mixed

Bank of America stock has been flying higher in recent quarters. However, the stock is currently pulling back and may need time to consolidate. 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 below its rising key averages which signal neutral to bearish 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

27.41%

46%

44%

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

May Options

Steep

Average

June Options

Steep

Average

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

2014 Q1

2013 Q4

2013 Q3

2013 Q2

Earnings Growth (Y-O-Y)

-50.00%

866.67%

20%

68.42%

Revenue Growth (Y-O-Y)

-2.72%

364.48%

-1.52%

3.46%

Earnings Reaction

-1.58%

2.26%

2.24%

2.8%

Bank of America has seen increasing earnings and mixed revenue figures over the last four quarters. From these numbers, the markets have had conflicting  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

-4.27%

-6.14%

7.09%

-9.60%

-2.23%

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 fell the most in a year after suspending a dividend increase and $4 billion of planned share repurchases because of an error in its stress test submission to the Federal Reserve. The stock has been exploding to the upside in recent quarters, but is currently pulling back. Over the last four quarters, earnings have been increasing while revenues have been mixed, which has produced conflicting feelings among investors. 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.

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