Morgan Stanley upgraded Bank of America (NYSE:BAC) on July 8, 2013, to an "Overweight" rating from "Equal Weight" while raising the price target from $13 to $16 in the face of the Federal Deposit Insurance Corporation approving dual standards for bank leverage capital ratios. The new measures will force bank holding companies to 5% and banking units to 6% as compared the 3% minimum set by Basel. With that in mind I want to evaluate on a fundamental, financial, and technical basis if it's worth buying Bank of America right now to replace my JPMorgan Chase (NYSE:JPM).
Bank of America currently trades at a trailing 12-month P/E ratio of 43.13, which is expensively priced, but I mainly like to purchase a stock based on where the company is going in the future as opposed to what it has done in the past. On that note, the 1-year forward-looking P/E ratio of 10.18 is currently inexpensively priced for the future in terms of the right here, right now. Next year's estimated earnings are $1.31/share and I'd consider the stock cheap until at least $19.65. The PEG ratio (1.84), which measures the ratio of the price you're currently paying for the trailing 12-month earnings on the stock while dividing it by the earnings growth of the company for a specified amount of time (I like looking at a 5-year horizon), tells me that Bank of America is fairly priced based on a 5-year EPS growth rate of 23.39%.
On a financial basis the things I look for are the dividend payouts, return on assets, equity and investment. Bank of America boasts a dividend of 0.3% with a payout ratio of 12.5% while sporting return on assets, equity and investment values of 0.2%, 1.6% and 6.8% respectively; which are all respectable values. If maybe you feel the market will retract a little more and would like a safety play then the 0.3% yield of this company is not good enough for you to take shelter in for the time being.
Looking first at the relative strength index chart [RSI] at the top, I see the stock at around a middle ground value of 57.08, but with an upward projection; this tells me that there may be a little bit of upside to the stock. To confirm that, I will look at the moving average convergence-divergence (MACD) chart next and see that the black line is above the red line and that the divergence bars are increasing in height to the upside, indicating there may be a bit of upside coming. As for the stock price itself ($13.37), it's slightly above the 50-day moving average and I'd expect the 50-day moving average to act as support. If the stock can bounce up off of the 50-day moving average, I can see it going to $13.68, but if it can't, I see it going down to $12.90 for a risk/reward of -3.52% to 2.32%.
- On 27Jun13 an investor purchased 50,000 January $11 Bank of America puts which may be used to hedge a long side position. This action took place a couple weeks before earnings and tells me that the buyer of these puts might not believe the stock will act well after earnings.
- On 07Jun13 Macquarie initiated coverage on Bank of America with an "underperform" rating and a price target of $12.
With the passing of the new measures for the leverage capital ratio requirements Bank of America may have to postpone any dividend increases even further into the future. "Mid-cycle" stress tests are due this Friday (12Jul13) and these tests are self-administered based on scenarios of the banks' own choosing. If Bank of America can show good results with a difficult test then perhaps they can ask to increase their dividend. Fundamentally this is a great value stock based on future earnings. Earnings growth is estimated to be phenomenal with a 23.39% rate for the next five years. If you like a value play with an earnings growth story then this stock may be just for you. This stock fits the bill for replacing my Chase position in the portfolio but I want to wait until after earnings on 17Jul13 before starting a position.
Disclaimer: These are only my personal opinions and you should do your own homework. Only you are accountable for what you trade and happy investing!