Earnings season is underway, and it starts with the banks. JPMorgan (NYSE:JPM) led off on Tuesday, with Bank of America (NYSE:BAC) following up yesterday. So far, the results have been pretty good. Based on the numbers, the owners of Bank of America stock have little to worry about
The quarterly results of JPMorgan, Citigroup (NYSE:C) and Bank of America were all strong. All three banks beat analysts’ average top- and bottom-line estimates, helping justify the surge that these stocks have had over the past few months.
BAC earned 74 cents per share in Q4, beating analysts’ average estimate by 6 cents. Its revenue of $22.35 billion slipped 1.7% year-over-year, but still topped the mean estimate by $50 million.
Based on the headlines, some investors may feel more compelled to go with Citigroup or JPMorgan over Bank of America stock. Both Citi and JPM crushed top-line expectations, have higher dividends than BAC and generated high-single-digit-percentage revenue growth.
But let’s stop focusing on the quarter for a minute and think about the longer term.
Valuing BAC Stock
Bank of America stock is not expensive. In fact, based on banks’ price-earnings ratio, none of them is expensive. For nearly two years, this group has struggled to go anywhere, mostly trading sideways.
Bank of America stock trades at just 10.7 times analysts’ average 2020 earnings estimate. Although the mean estimate calls for YoY revenue growth of just 0.4% — which is an acceleration from the less than 1% YoY decline of the bank’s top line in fiscal 2019 — the average earnings per share forecast calls for a jump of 11.5% to $3.01.
While the revenue growth expectations for BAC are among the lowest for large banks, the estimates for its bottom line are among the highest. That said, analysts, on average, expect three other banks — Citigroup, Wells Fargo (NYSE:WFC) and Goldman Sachs (NYSE:GS) — to have earnings growth in excess of 10% in 2020.
| Stock | 2020 Rev Growth Estimate | 2020 Earnings Growth Estimate |
| BAC | 0.4% | 11.5% |
| GS | 3.2% | 10.3% |
| WFC | 1.4% | 10.2% |
| C | 2.1% | 10% |
| JPM | 2.2% | 6.2% |
Essentially, Bank of America stock is performing roughly in-line with its peers. For investors who want the best combination of yield, valuation and growth, Citigroup is the best pick. For those who want a best-in-breed bank and are willing to pay a premium for slightly slower expected earnings growth, JPM is one route to take.
Bank of America stock is a solid pick in a sector that’s doing well. BAC doesn’t look poised to drastically outperform or underperform its peers in 2020. But investors should wait for a pullback of Bank of America stock before buying the shares.
Trading Bank of America Stock
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I loved buying Bank of America stock over the years because it’s been a great range-bound trade. Buying dips into the mid-$20s and selling the shares for $30-plus has worked for years. But last quarter, BofA stock broke out.
It catapulted over its resistance and surged higher. I sold my remaining shares after their first pop over $33. At the time, that looked like a great move. But Bank of America stock would rise almost $3 more per share.
What do the charts look like now? Bank of America stock has been consolidating between $34.25 and $35.25. For it to continue higher, investors will have to find enough positive takeaways in the Q4 report to break it out of this range.
While the report was fine, it wasn’t over-the-top great, which is what the stock needs in order to break out after such a powerful run. Since C and JPM didn’t have much positive momentum after reporting better headline numbers, I don’t see how Bank of America stock can perform differently.
That doesn’t mean I’m bearish on BAC, though. Simply put, I’m waiting for Bank of America stock to dip before buying the shares. On the weekly chart, each time the RSI indicates that the shares have become overbought (as shown by the blue circles), BAC stock tends to stay flat or decline for a prolonged period.
On a dip below the stock’s short-term range support and the 10-week moving average, investors will be looking for a buying opportunity. The question is, how much will Bank of America stock decline? I would love a chance to buy BAC in the $32 area, just below its 2018 highs.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell did not hold a position in any of the aforementioned securities.
