Tomorrow is earnings day for Bank of America (NYSE:BAC). The stock is just a dollar away from its yearly high, as investors have bid the shares up from the yearly low in the low $22 range just a few short weeks ago.
Shareholders are already aware that the company will be raising its quarterly dividend to $.12 cents starting the 3rd quarter 2017. The Fed recently gave the go ahead after the big bank passed the most recent stress test.
In addition, the company has authorized a $12B buyback from July 2017 through June 2018. This action, along with the dividend increase, should keep a solid floor under the stock near current levels.
Earnings report volatility
Anything can happen in regards to short-term movements when companies report earnings. Last week’s report by JPMorgan Chase (NYSE:JPM) showed that to investors as the stock sold off $2 on strong earnings.
Will this be a sell the news report or a gap up and rally at the open? No one really knows the answer, so the only way to play is to be in the game.
Last week, I wrote a short piece stating that while I like Bank of America’s story, I sold the $25 level as I believed the stock might have one more shakeout to the $22.50 level.
The quick drop on Friday to $23.84 on JPM’s selloff created what in my view was a buying opportunity. Was it the near-term bottom? I do not know, but I bought back in with a 50% position on the weakness.
I would like to own more, but discipline will keep me from buying until I see the trading action and study earnings tomorrow. Bank of America is going to continue buying back stock and I believe it will do that on the occasional big volatility days. There is nothing worse than being all in only to watch a stock that you love plunge as Mr. Market squeezes out weak hands.
I am expecting earnings to be in line and my estimate is for $.43 a share with trading revenue down from the previous quarter. The question is how will the market react? Personally, I am hoping for a mini selloff so I can have the opportunity to add to the position.
Warren Buffett Effect
Mr. Buffett will be converting his preferred shares to common following the formal announcement of the upcoming dividend increase. There are those that feel that the 700M share dilution is already priced into the market, they may or may not be right.
Investors will likely feel more emboldened knowing that the Oracle of Omaha is the bank’s largest shareholder and not likely to sell anytime soon. His disciples know that he loves stock buybacks and dividend increases which is now going into full swing within the company.
A look at the Charts
The above is a 30-minute chart that spans two months. I am sharing this chart to show the possibilities of where the stock could trade tomorrow and over the next couple weeks.
One can see the gap down last Friday catching some of those weak hands in the drop to the $23.80 level and the slight rally back. In my opinion, investors are set up, not sure which way the stock will trade tomorrow. An earnings miss could see the stock gap down to test the $22.70 level where it traded on June 26th. A beat could see the stock gap up over the $25 level and rally.
A year-to-date daily chart:
The daily chart above gives investors a snapshot into this year’s trading action. The chart shows a nice little shakeout that started in March and lasted nearly 3 months. The rising moving averages are showing traders that the trend is up. In my view, the ideal buy point is on weakness around the $22.10-$22.70 level, but I have a gut feeling that may now be wishful thinking.
Bank Of America along with the financial sector are poised to outperform going into the second half of the year. Bank of America is making solid progress, buying back stock and increasing its dividend.
I have been bullish on the stock since last year when it traded at $12 a share. While there may be some short-term volatility, it is my opinion that the stock will close in the $30 range by year-end.
Anything can happens around an earnings release, I have no idea how the stock will trade immediately following the release, but I will say this: I am a buyer on weakness. I like the stock right here and I love it in the low $22 range where I bought it a few weeks ago. Investors will want to pick their spots wisely to maximize profits.
As always, do your own research and know your exit points before making any trades.
Disclosure: I am/we are long BAC,LYG.
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.