(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)
Bank of America Corp. (BAC) stock has posted a solid return over the past year, rising by about 26.5%, more than double the S&P 500's return of 13%. But slowing earnings and revenue growth, and a flattening yield curve, may stand in the way of the bank's ability to rebound. In fact, since the middle of March, shares of the bank have fallen by nearly 12% from its highs of about $33. Now, more ominously, the technical charts suggest the bank may have even further to fall, perhaps by as much as 10% from its current price of around $29. (For related reading, see also: Why Bank of America Sees 2018 Stock Returns Near 20%.)
The stock tried to break out in the middle of May but woefully failed and has been unable to regain any of its past momentum. Even better than expected results in mid-April have been unable to halt the negative energy in the shares.
The stock fell below two critical levels of technical support on June 22, that suggests there are more declines to come. First, the stock had dropped below a significant technical uptrend that has been in place since July of 2016. Second, the stock has fallen below a technical support level at roughly $29.20, a level that the stock has tested multiple times since December of 2017. Should the stock continue to decline over the next few days, it is an indication that shares are heading lower to the next level of support around $25.95, a drop of 10.5%.
The relative strength index has also been trending lower since hitting an overbought reading of roughly 82 at the end of January—a sign that momentum is coming out of the stock. The index would need to drop to 30, from its current level of approximately 40, to reach oversold conditions.
Earnings in the second quarter are expected to be strong, despite analysts reducing estimates by about two percentage points, making for a year-over-year earnings growth of about 35%. But it is estimated that there will be no revenue growth when the company reports results some time in the middle of July. The full-year earnings are seen climbing by about 40%, while revenue is expected to rise by only 5%. (For more, see also: Why Big Bank Stocks Are About to Crumble.)
Next year will be the problem for the bank with earnings expected to grow by only 13.6%, as the benefits of tax reform normalize. Meanwhile, revenue is expected to grow about 5% again. But interestingly, since the middle of May when the company last reported results, analysts have reduced their outlook for earnings in 2019 by about 25 basis points. This is not an alarming amount, but a trend worth watching to see if it should continue.
Another potential headwind is the flattening yield curve, as the rate at which banks borrow money to then lend out is contracting—potentially shrinking revenue.
Perhaps earnings in July can turn the fate of the stock, but it may also be too late by the time the results come.
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.