Long term investors in Bank of America (NYSE:BAC) haven't had much to cheer about lately but it looks like that is about to change. The stock finally went positive for the year last week and it looks like the uptrend is just getting started.
Interest Rate Increase?
The market sell-off in January and early February put a hold on rates for what turned out to be longer than most thought possible. That sentiment is changing as the market now expects an increase of .25% after the election in December.
Bank of America has $250B in deposits and stands to rake in billions of extra earnings to their bottom line on any small incremental rate increase.
Last week the company reported net earnings of $5B or .41 cents a share. Revenue was up a modest 3% at $21.6B reflecting strong trading and banking fees, both up 13% and 14% respectively.
A look at the charts
Above is a two year chart showing the dramatic drop at the beginning of this year when the stock traded down to the $11 level on fears of massive bankruptcies related to oil trading below $30.
Fast forward eight months and oil is looking relatively stable, trading in the high $40 to low $50s. Couple that with a likely hike in interest rates and investors have two positive catalysts that can propel Bank of America's stock price into the low $20s.
Some investors are hesitant to jump into the market until they know who will be our next President. Volatility may give investors another opportunity to pick up the stock in a sell-off but that ship may have already left the harbor.
A couple weeks ago I wrote an article on the Wells Fargo (NYSE:WFC) fraud scandal bringing up the possibility of contagion within the banking sector. That has not materialized to date, I stated that Bank of America had to hold the $15 level in order to go higher and that is exactly what happened.
A look at an intraday chart
As you can see, investors got a chance to buy on a morning gap down at $14.80 for a few minutes and then it was off to the races. I now see the stock price rising into the end of the quarter and breaking the $20 level before the year end.
Bank of America has been in the dog house most of the year and it's time to play catch up. I believe investors and Hedge funds are loading up and will now play the bank from the long side for the foreseeable future.
Oil stabilizing around $50 removes the risk of default from many companies in the oil business. All of these factors combined with a huge infrastructure stimulus in the coming year will be bullish for the banking sector.
As always, do your own due diligence and know your exit point before making any trade.
Disclosure: I am/we are long BAC.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.