Bank Of America: Time To Sell?

Summary

• 2018 has proven itself to be an already-chaotic year for the financial markets.
• So far, the banking sector has emerged as a special star in an increasingly uncertain global growth environment.
• But it may be time to sell Bank of America, as the stock is looks less impressive in that group and we have reduced position sizes in our BAC long.

Image Source

Already, 2018 has been a chaotic year and dividend investors are looking for ways to protect themselves from the next major shocks. At some stage, all of the uncertainty created by external trade discussions will need to show itself in quarterly earnings figures - and that has not happened within the banking sector. If anything, those uncertainties have made banks more attractive, as volatility in the financial markets has improved revenues for most of the major names in the industry. The position of Bank of America Corp. (NYSE:BAC) is looking less impressive within this group, however, and we believe the stock could continue to have trouble gaining in upside momentum. We have been signaling this for the last few weeks, and recent price moves have pushed us into a call for action. We have not flipped to an outright sell stance on the stock. In fact, we will continue to hold half of our trade initiated on the drop to $15. But we have reduced our position size in BAC to keep capital available for new portfolio allocations in the banking sector.

Chart: CNN Money

When compared to what has been seen in many other sections of the market, it can be said that BAC has treated us well. Massive bull runs in the stock have propelled BAC to gains of 81.87% over the last three years. More near-term, however, the picture is not as exciting. This year, BAC is higher by only 0.75% - even after strongly positive earnings releases have received a large amount of attention in the financial news media.

Chart: Federal Deposit Insurance Corp.

Of course, those earnings have been terrific - relative to expectations, at least. Several macro factors are working in combination to support the outlook for BAC and most of the other big banking names included in the holdings of the Financial Select Sector SPDR ETF (XLF). Higher interest rates, broad-based financial markets volatility, and rising credit card loan fees have all worked to position the banking sector as the true star of this earnings season.

To be sure, Bank of America has held a position within those bullish trends. For the most recent quarter, Bank of America reported per-share earnings at 62 cents (which was a modest beat on the 59 cent per-share that was expected). Business segment loans came in at $864 billion (a gain of 5%). Consumer banking business revenues rose by $9 billion (a gain of 9%), and this was helped by the segment's 13% increase in net interest income. Ultimately, last year's tax legislation helped reduce Bank of America's tax rate by 9% - and this performance has largely fallen in-inline with our prior expectations for BAC.

Bank Trading Revenues: Bloomberg

But when we look at annualized revenue growth, BAC appears to be the laggard. Annual revenue growth rates at Bank of America fall behind both the banking sector averages and the broader market-at-large. In light of this, we believe it is time to rethink BAC's weighting within our portfolio.

Of course, the news is not all bad - and there are still reasons to believe that valuations for Bank of America will continue to move higher. Trading volatility helped Bank of America in ways that came in near the top of the sector. The performances are even more stark here when considering the initial expectations that were seen for trading revenues at the bank. Only Citigroup (C) was able to post comparable numbers for the quarter, and these trends could continue to support BAC if more "flash crash" activity in the stock benchmarks is seen in the second half of this year.

Banking Sector Earnings Chart: Bloomberg

Our stance here is that Bank of America is becoming increasingly vulnerable to underperformance relative to its peers. This is a list that must include JP Morgan (JPM) after its own incredible quarterly performances. But this is a factor that might be difficult to see, given that the group as a whole is generating its highest EPS figures since the financial crisis.

Fixed-Income Chart: Bloomberg

Portions of BAC's lagging activity stem from annualized declines in fixed-income, which were not as destructive for many of Bank of America's peers. BAC was actually expected to post gains in these areas, and this is a trend that could continue to present comparative disruptions in earnings releases over the next few quarters.

Chart Analysis: Dividend-Investments.com

Over the last few months, we have highlighted the possibility that BAC would fall to $29 and even lower before a significant rally higher was going to be possible. In most cases, this stance was met with strong disagreement from other bullish investors. But here we are: struggling to make a sustained break above $30 despite what is mostly good news on the earnings front. We believe that BAC will continue to underperform in these key areas, and the persistent weakness at current price levels suggests that there are not many active buyers left in the market.

We are viewing next price resistance in the stock as coming in at $31.20, and we could continue to see sideways activity on any approach of that level. We may decide to close-out the remainder of our long position if BAC ultimately struggles in these areas.

What is your position on BAC? We look forward to reading your comments. Stay tuned to Dividend Investors and receive our next alerts by clicking the "Follow" button at the top of the page.

Analyst’s 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.