(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)
Bank of America Corp.'s (BAC) stock has already dropped 17% from its highs. Now technical analysis suggests the stock is on the cusp of falling 6% more. Should that happen, the stock will have entered into a bear market more than 20% off its highs.
Despite the steep drop the stock is trading at a very high valuation based on its price to tangible book value. This high valuation comes despite significantly slowing earnings and revenue growth in 2019.
Chart Breaking Down
The chart shows that the stock is failing to rise above technical resistance at $28. That suggests the stock may fall back to technical support around $26, declining from its current price around $27.40. The relative strength index has been steadily trending lower since peaking at overbought levels in January. It suggests that bullish momentum continues to leave the stock.
The stock's sharp drop has not helped the valuation much, with the shares trading a price to tangible book value of 1.57. That is still well above the historical range of 0.5 to 1.5 since 2010. The valuation would need to drop to around 1.2 to come back to the historical norm.
BAC Price to Tangible Book Value data by YCharts
Another potential headwind is slowing earnings growth in 2019. Earnings growth is expected to slow 12% down from 40% in 2018. Additionally, the estimates for 2019 have fallen steadily since the summer. Revenue estimates for next year have also dropped to around 4% from 5%.
The slowing growth and declining earnings estimates for 2019 may be one reason why the stock is currently trading with a 2019 PE Ratio of 9.5. It may suggest investors believe earnings estimates will continue to fall.
The stock, along with many banks, may continue to struggle should the U.S. yield curve continue to flatten. Meanwhile, slowing loan growth has also plagued this group in recent months. Should that trend continue, Bank of America and other bank stocks are likely to continue to struggle.
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.