On Monday, Bank of America Corp (Ticker NYSE:bac) reports the results of the first quarter. The banking giant beat both earnings per share and income expectations. Despite the good results, shares of bac were down in early trading Monday in September in the afternoon around 1%.
So what gives?
Unfortunately for bullish investors, the reaction to the Bank of America stock was not too surprised. It follows the same pattern — top and bottom-line beat, followed by a stock-lower prices — as Houston JPMorgan chase & co. (Ticker NYSE:jpm), Citigroup Inc (Ticker NYSE:From) and “wells Fargo” and Co (Ticker NYSE:WFC).
The price movement creates a quandary for many investors, given the fundamental backdrop, banks work within. Interest rates are on the rise, allowing the banks to pocket more billions in profits annually. The economy is good, growth is strong and the rating will be quite cheap.
The lack of enthusiasm on the results surprising. One of the reasons may be the fear of inverting the distribution of the bonds. I recently raised this fear with JPMorgan. Despite the excellent earnings results NDM, stocks also fell.
As the yield spread between long-term Treasury bonds and short-term treasuries continues to decline, many fear that it may be trying to tell us. The bears say that this means we may be approaching a recession. 10-year and 2-year Treasury yield and 30-year and 5-year yields are at their lowest level since 2007, during the financial crisis. In combination with the Federal reserve reducing its balance sheet, the economy may be on shaky ground.
The bulls, on the other hand, there is a simple explanation. After the great recession, the fed was forced to cut interest rates to zero in hopes of stimulating economic growth. Now, when the economy is chugging along with enthusiasm, we need to “normalize” these percentages and increase them. Something the Bulls said is overstating the yield on short-term bonds, with less effect on long-term Treasuries.
Quarter and year for bac
That all seems complicated and under the radar for many investors. But this is a serious concern which they say on wall Street. As it relates to the bac shares specifically, although outside my sphere. This means that, if a recession looms on the horizon, I do not believe that the case for 2018, why more shares will be under pressure? Why only banks? Any cyclical business will be under threat as the market as a whole.
When I look at the bac stock, it doesn’t scream “sell!” If anything, I want to find a place to buy the Bank.
In the quarter, revenues rose 3.8% year on year (yoy) and earnings per share of 62 cents came in 3 cents a share above expectations. While income growth was just OK, profit jumped almost 40%. This is a huge increase, not just a one-time boost.
Analysts believe that the company’s financial first quarter playing throughout the year. This means that they expect revenue growth of 3.8% in 2018 and annual net profit by 36%. That’s impressive; and 2019 should not be weak. Short of a recession, analysts had expected sales growth to accelerate to 4.1% and earnings will grow by 14%.
It leaves the tank is stock trading at a paltry 11.8 times earnings by 2018 and 10.4% 2019 ratings. While not widespread, it is also worth noting that Bank of America stock has a 1.6% dividend yield. How you can sell shares at such a discount, given the pace of growth and a strong background?
This is one reason why, like jpm, I think that stocks should go higher, not lower, wages.
Trade Bank of America stock
Support at $29 was quite strong, despite the lack of tangible reasons why — at least when you look at the charts that is. However, this level holds during a panic sales in the S&P 500 in February, and further trade-war sales in March. It is still holding above the post-earnings level.
Click to enlarge
This leads me to believe that the reserve tank will be above these levels. Below $29, and I would be much more concerned. It would be more encouraging to see the Bank of America above its 50-day and 100-day moving averages. If so, this puts a retest of the breakout 32.50 $we saw last month are back in the game.
Keep in mind, Goldman Sachs group Inc (GS) earnings reports on Tuesday, while “Morgan Stanley” (Ticker NYSE:MS) earnings reports on Wednesday.
Bret Kenwell Manager and author of the forthcoming “blue chips” and on Twitter @BretKenwell. At the time of this writing, Bret Kenwell held a position in NDM.