(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)
Bank of America Corp's (BAC) recent trading patterns suggests the stock could be headed higher - by nearly 50 percent - to $40 from its current level of around $27.25, according to a technical analysis.The stock has recently broken out to trading levels not seen since 2009, and if that wasn't enough, the company could be getting a substantial fundamental tailwind in the form of corporate tax cuts and interest rate hikes.
Shares of Bank of America have hit resistance levels a number of times around $25.50 since March and recently broke out at the end of September. Strengthening the bull case is how the stock was able to retest the $25.50 and hold strong, helping the shares move even higher.
Strong Technical Chart
The chart above shows that shares of Bank of America consolidated, then rallied sharply after the November, 2016 Presidential election. The $25.50 level has served as resistance in the past with the shares testing that level in January. But since September, the stock has risen sharply higher and is currently trading at roughly $27.25. One can derive a price of about $40 for shares of Bank of America based on the next potential area of resistance, which dates back to 2008.
Tax Reform, Rates
Further supporting the bank's stock is the Trump administration's plan for corporate tax reductions, which could be a huge benefit for the company if they become law. In the latest quarter, the bank had an income tax expense of nearly $2.279 billion on pre-tax income of $7.866 billion, representing an effective tax rate of almost 29 percent. Any reduction in the corporate tax rate would go right to the bottom line, boosting earnings.
Additionally, the company had net interest income in the quarter of nearly $11.16 billion, representing 51.1 percent of its revenue for the quarter. Bank of America could generate more revenue in net interest income if the Fed continues to raise rates or push forward with plans to pare its $4.4 trillion balance sheet. Both steps would cause rates to rise.
Trades At A Discount
Bank of America has another advantage. It trades at a discount to peers JP Morgan and Wells Fargo based on its price to tangible book value. Currently, shares of Bank of America trade at 1.62 times its tangible book value, which stands at $16.86, according to data from YCharts. Bank of America shares would need to rise to nearly $33 just to trade at parity with the other banks.
The strength of Bank of America's stock is a dramatic change from the 2008 financial crisis, when a deteriorating portfolio stemming from two major acquisitions threatened the bank's very existence. What a difference a decade makes. The stock today appears on track to continue its advance.
Michael Kramer is the Founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer's bio and his portfolio's holdings. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance.