Bank of America (BAC) Stock is Climbing, But Why did it take So Long?

Bank of America (BAC) stock is currently trading above $35 per share, in stark contrast to its multi-year performance where it failed to break through the critical $30 barrier. At its current price of $35.47(+/-), Bank of America has a market capitalization of $319 billion with a price/earnings ratio of 13.07, a forward dividend of $0.72, and a yield of 2.07%. For traders new to the world of BAC stock, the recent performance is somewhat of an anomaly.

Source: Plus500 Bank of America (BAC)

BAC stock was hovering around $29 per share ever since December 2017, and only recently has the stock started to climb in value. This is fully supported by analyst consensus which deems BAC stock to be heavily undervalued. The recent appreciation in BAC stock began in August 2019 when it was priced at $27.51 per share. In the four months since, the stock has gained approximately $8 dollars per share, reflecting a 29% appreciation. In spite of this, the price is still relatively low.

Source: Bank of America (Bollinger Bands)

The 50-day MA (moving average) of BAC reflects a price of $33.86 per share, while the 200-day MA indicates a price of $29.93 per share. The prevailing price is above both the short and long-term moving averages, indicating that the trend will continue in a bullish fashion. When Bollinger Bands are introduced to the charts, some interesting trends can be gleaned. For example, the upper Bollinger Band is at $35.62, the median Bollinger Band is at $35.09, and the lower Bollinger Band is at $34.55.

The current price of BAC is fast approaching the upper band, indicating that the stock may be headed for overbought territory, in which case a selloff will ensue. If the price of BAC stock falls below the lower band, the stock is considered oversold and will be subject to an upward correction. This data is reflected in the above chart of BAC, courtesy of StockCharts.

Factors Impacting Banking Stock Prices

Many factors are at play with banking stock prices, notably interest rates, tax rates, regulatory compliance, and the most important factor of all, bank profitability. The sweeping tax cuts passed by the Republican-led House and Senate, and signed into law by the president were expected to have an outsized impact on corporations, including the big banks.

When companies pay less in corporate taxes, the expectation is that they will be reinvesting their profits in the company for growth and expansion, and in the broader economy to facilitate robust growth. Whenever widespread changes are made to a company’s tax regimen, there is always a significant lag effect at play. Analysts caution that the passage of new tax legislation, and the time before it becomes effective will not necessarily be evident in stock prices.

That the Trump administration has purportedly cut two regulations for every new regulation implemented is equally important. When banks have a freer hand to act in the economy, there is less lag on their ability to be profitable. The strict regulations put in place with Dodd-Frank were designed to provide oversight control over the stock market, keep eyes on major insurance corporations, and stop banks from using their own hedge funds for their own profit a.k.a. the Volcker Rule.

While many believe that Trump repealed Dodd-Frank, this is simply not true. The new financial rules have left Dodd-Frank largely in place. The objective of the amendments was to create a balance for the financial system, allowing for greater parity, and the allocation of additional capital to municipal governments. Thus, the impact of Republican-led amendments to Dodd-Frank were negligible and served little purpose vis-a-vis banks’ stock prices.

Analysts have a long-term bullish rating assigned to BAC stock with support levels at $30.13, and resistance at $35.15 per share. In terms of the company’s viability as a must-buy stock for 2020, there are several reasons why analysts are in favor of BAC. These include the following:

  • Bank of America is benefiting from a rapidly improving US economy with strong loan growth data. The company has big plans in store including 2500 center redesigns, 500 new centers, and major tech upgrades by 2021.
  • Bank of America’s stock price remains undervalued, despite its short-term appreciation. The industry averages of price to book and price earnings are higher than BACs figures.
  • Bank of America continues to deliver strong returns, with an improved selection of digital banking offerings, including Erica and Zelle.
  • Bank of America has embarked on an aggressive cost-cutting strategy which is anticipated to reduce operational expenses in 2020, over 2019.

BAC stock looks set to perform strongly in 2020, provided the economic fundamentals remain intact. The company has all the fundamentals in place to make sustained gains this year. With low unemployment, accommodative monetary policy with low interest rates, and a global economy on the mend, BAC will likely consolidate gains and shift from its current undervalued status to reflect correct pricing.

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