Is the stock attractive at the current market levels?

Incorporated back in 1874 in San Francisco, the Bank of America (BAC) is a leading American multinational investment bank and a financial services company with central hubs in New York City, Hong Kong, London, Dallas, and Toronto. In fact, the BAC is the second largest banking institution in the United States after JPMorgan Chase and it is among the top 10 financial institutions in the world by revenue. Bank of America is among the Big Four banks in the US and it services approximately 11% of all American bank deposits, competing directly with the other top leading banks, such as Wells Fargo, Citigroup and JPMorgan Chase. The Bank’s main business is in the commercial banking, as well as wealth management and investment banking.

Financial performance, coronavirus impact and future expectations

Bank of America’s share price has outperformed the industry over the past year, led by strong financial results and solid revenue as well as earnings figures that have been helping the company maintain its leading role and presence in the financial sector.

The company has actually beaten earnings expectations in 3 out of the last 4 quarters, which has in turn been very favourable for its overall share price performance. The Bank has been opening new branches, as well as improving their digital offerings and using different techniques for managing costs, which is expected to further increase its profitability in the future. In fact, the company has been maintaining a strong balance sheet and liquidity position over the past few years and that is also expected to continue supporting its financials and overall market positioning amid the economic slowdown caused by the coronavirus pandemic and its negative consequences. Yet, the near-zero interest rates are expected to have a negative impact on the company’s revenues and profits and that should be taken into account when analyzing the company’s financials and the expectations for the future.

Let’s have a look at the company’s financials over the past few years.

Bank of America has done a great job over the past 5 years since 2015. The revenues and net profits have been rising steadily and the company has been paying a pretty decent dividend that has been yielding around 2.50-3%.

Even though the market environment has been quite challenging, deposits and loan balances have remained strong in the past few years. In fact, loan and deposit balances are expected to grow further, based on a steady demand due to the lower interest rates environment.

Based on its strong market positioning and financial performance, the company had kept on beating analysts’ earnings expectations for 4 years since 2016. In fact, the Bank has been performing a lot better than what analysts had expected and hadn’t missed on an earnings report during that period of time. Yet, because of the coronavirus and its negative impact on the economy, the company delivered a worse than expected earnings per share (EPS) figure of $0.40 for the first quarter of this year, lower than the analysts’ expectations for $0.42 (-4.76%). Yet, taking into account the negative market sentiment and the slowdown in the global economy, we believe the report wasn’t that bad actually. The positive take from this report is that the company managed to beat analysts’ revenue expectations for the first quarter of 2020.

The leading Bank actually proved that it could remain strong and still perform well even during the coronavirus and the economic slowdown that followed.

Bank of America reported stronger than expected financial results in the 2nd quarter of 2020. The earnings per share came out at $0.37, which was a lot better than the $0.27 expected by analysts. As we stated above, the 1st quarter results were not so bad even though there was a bit of a decline in the net profit. However, the 2nd quarter results showed that the company’s financials have remained strong and we are looking forward to the upcoming 3rd quarter results in October as they would be very important for the future direction of the share price.

The BAC’s expense-saving plan called – Project New BAC, which was launched in 2011 helped the company improve its overall efficiency and save around $8 billion in operating expenses until the end of 2014. Furthermore, as mentioned above the Bank has been taking into account the current situation with the coronavirus pandemic and is expected to continue managing its expenses thoroughly, which in turn would help the leading financial institution perform quite well even during the economic slowdown caused by the virus. 

Moreover, the Bank of America has continued to align its banking sector network according to customer needs. It is expected to open 500 new centers in new cities and improve its current centers with technology upgrades by 2021. The Bank is also opening fully automated branches that will be able to feature ATMs and video-conferencing facilities, giving a chance for its customers to communicate with off-site bankers.

It is also important to say that the Bank has kept its debt pretty low compared to its competitors, which is vital for its longer-term success in the business especially during such times of uncertainty and economic slowdown.

Therefore, by analyzing the company’s favourable factors and its record of consistent earnings growth, we shall say that Bank of America has got a lower credit risk and the chances of defaulting on its interest and debt payments in this economic slowdown have decreased, which might mean that owing BAC shares could look like an attractive investment opportunity.

Technical analysis

By looking at the BAC chart, we could easily see the massive sell-off that sent the price from the $35 highs on the 20th of February towards the $18 lows a month later. In fact, the stock lost almost 50% of its value during the coronavirus sell-off where investors and traders were extremely scared of the situation with the virus and started selling their stocks all across the board. Yet, that correction was seen as a great investment opportunity for the smart investors who realized the fact that they could own one of the leading Banks in the world by buying it at a significant correction that we had not seen since the financial crisis of 2008.

Therefore, smart money started flooding into the market and that has led to a massive appreciation on the stock in the past 5-6 months since the end of March.
BAC bottomed out from the $17.95 lows on the 23rd of March and that is the level from which the strong uptrend started. The price has managed to break a few key resistance levels in the past few months to reach the $27.75 highs on the 11th of August. Since then though, we have been seeing some profit-taking interest across the board that has sent the price towards the current $25.50 (8% correction).

We remain very bullish on BAC stock and believe the leading Bank will perform well in the next few months, which will further drive the share price higher.

By looking at the chart, one could see that the price is currently struggling to go lower as it has already reached the strong diagonal and horizontal support marks at $25. Furthermore, the lower Bollinger band line matches with the support mark, while the other technical indicators have almost gone to the oversold territory, and the 38.20% Fibonacci retracement level matches perfectly with the support at that point, meaning all those indicators are giving very strong buying indications to follow up on.

Last but not least, the price is currently forming a double bottom figure at that key support mark at $25, which is usually seen as a very strong buying indication as well. Therefore, we believe the recent profit-taking correction that occurred is giving us a great chance for owing the leading banking stock at a great discount, which in turn would allow our followers to maximize their profits to the upside.

Chart: Bank of America (BAC)

As you know, before we take an action, we at Dow Experts need to make sure our correlation-confirmation model is also giving bullish indications that would further confirm our bullish stance on the stock and only then we would be able to take an action and buy the BAC.

Financial Select Sector SPDR Fund (XLF)

The Financial Select Sector SPDR Fund (XLF) is one of the biggest ETFs out there that represents the performance of the leading financial institutions in the US.

In fact, the Bank of America is one of the biggest holdings of the XLF with its 8% weight within the portfolio, making it the 3rd biggest holding after Berkshire Hathaway (13%) and JPMorgan Chase (12%).

In other words, the XLF invests a big portion of its funds in the Bank of America and there must be a reason for that – the Bank has been a global player in the sector it operates and is expected to keep on delivering great financial results and keep improving its market positioning and overall performance.

By looking at the chart, we could see that the BAC and the XLF look very much alike. We have seen a massive appreciation on the XLF since the end of March when the price bottomed out from the $17.50 to reach the highs at $26 in the beginning of September. Similarly to the BAC, the XLF is currently testing a key support level at $24.40, which has been bringing lots of buying pressure in the past. In fact, the price tested that level in the end of August and traders and investors started buying aggressively straight away and pushed the price towards the $26 highs for the month. The lower Bollinger band matches with the 23.60% Fibonacci retracement line at that level, while the other technical indicators are about to start heading higher close to the oversold territory, giving lots of buying indications. In other words, the price-action trade of the XLF clearly confirms our bullish stance on the BAC and gives us even more reasons to be buying the stock after a profit-taking correction to the downside.

Chart: Financial Select Sector SPDR Fund (XLF)

SPDR S&P 500 ETF Trust (SPY)

SPY is the best-recognized and oldest ETF in the US, which typically tops rankings for largest assets under management and greatest trading volume. Actually, the SPY tracks the massively popular US index – the S&P 500.

In other words the SPY reflects all the great movements on the market and tracks the performance of the biggest index in the US, giving a chance for investors to benefit from all the day-to-day movements on the market and make high returns on their investment.

In fact, the relationship between the XLF and the SPY is 93%. That’s the reason we have decided to analyze the performance of the SPY in order to identify whether it confirms our bullish stance on the Bank of America and get an additional buying signal around the current levels.

Bank of America accounts for 1.09% of SPY’s total portfolio and is among the biggest holdings within the ETF. In other words, it plays an important role within the biggest ETF out there.

By looking at the daily chart of the SPY, we could easily see the strong uptrend that has occurred since the 23rd of March when the whole stock market in the US started recovering after the sell-off caused by the COVID-19 pandemic.

Ever since then, the price has been extremely bullish and has managed to reach its peak for the year at $358.75 on the 2nd of September from the $218 lows in March (65% appreciation). Since then, we have seen lots of profit-taking interest in the short-term, which was only logical after such a huge rally from the $218 lows since the end of March. The correction has sent the price towards the current support mark at $334 where lots of buying pressure is expected. In fact, the technical indicators have gone to the oversold territory and have started reversing to the upside, giving bullish indications at the current levels. Should the price manage to break that key support level, the next support mark stands at $323 where further bullish activity is expected to take place and the price is likely to bounce back up from either of these 2 levels. Overall, we believe the recent 7% correction is giving a great chance for investors to buy the SPY and make high profits on the way up.

Overall, the recent performance of the SPY clearly confirms our bullish stance on the BAC stock and we will be interested in adding the Bank of America to our portfolio, which would give a chance for our followers to maximize their profitability to the upside.

Chart: SPDR S&P 500 ETF Trust (SPY)

Conclusion

Our analysis today was based on the second biggest financial institution in the US – Bank of America (BAC). We have concluded that the Bank has shown a great financial performance over the past few years and has managed to perform quite well even during the COVID-19 pandemic. We like buying winners and those stocks that can perform well even during tough times on the market. Therefore, in order to confirm our bullish stance on the stock we have decided to analyze the recent performance of the leading ETFs out there who own the stock within their portfolio – XLF and SPY. In fact, both ETFs have clearly confirmed our bullish expectations on BAC and are giving very strong buying indications for the stock. Therefore, we have decided to start buying the Bank of America (BAC) stock at $25 where the first key support mark stands and lots of buying pressure is expected. In case the price breaks that support, we would be looking to add more to our buy positions at the next strong support at $22-$23 in order to get a better average price and make higher profits to the upside.
Our initial profit-taking target is set at $27.50, followed by the longer term target at $30-$31 where we would be fully selling our stake and wait for another profit-taking correction that would allow us to buy at a decent discount and make more money to the upside.

Sincerely,

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