by SignalFactory · January 14, 2020 | 08:51:39 UTC
Bank Of America May Surge Following Quarterly
Results
The bar for Bank of America
appears to be low going into fourth-quarter results.
Options traders are betting
that the stock will rally.
The company’s history of
delivering better than expected results set up an opportunity for a beat and
raise quarter.
Bank of America (BAC) will report results on Wednesday morning, and some
traders are betting that the stock will surge by as much as 7% by the middle of
September. Perhaps it will be the quarterly results that give the stock the
boost it needs to send the shares on their way higher.
The fourth quarter isn’t expected to be stellar for BofA. Earnings are
estimated to have declined by almost 1.5% to $0.69 per share versus last year.
Meanwhile, revenue is forecasted to have dropped by nearly 2.6% to $22.3
billion.
Bar Is Set Low
The bar has been set low for Bank of America going into these results.
The company has been able to beat analysts’ earnings estimates in each of the
last eight quarters.
Meanwhile, the company has been able to meet or exceed revenue estimates
in six of the last eight quarters.
With a low bar and the company’s history for topping estimates, it likely sets up a good opportunity for the company to do the same this quarter.
Betting On a Beat and Raise Quarter?
It could be one reason why some traders are betting the stock rises
above $37 by September 18. Changes in open interest show a spread trade took
place on January 10. According to data from Trade Alert, the September $37
calls saw their open interest levels rise by over 10,000 contracts, bringing
the total number of open contracts to around 21,900. Additionally, the $37
puts, saw their open interest increase by approximately 10,000 open contracts,
bringing the total number of open contracts to about 12,900.
The data shows that the puts traded on the BID and that the calls traded
on the ASK. It means that a trader sold the puts and bought the calls, which
created a spread transaction. It is a bet that Bank of America’s stock rises
above $37 by the expiration date in September.
Valuation Is Compelling
Despite the big run-up in the stock over the past year, the valuation is
still compelling, trading at roughly 10.7 times 2021 earnings estimates of
$3.25. Which makes the stock cheaper than peers JPMorgan (JPM), and in-line
with Wells Fargo (WFC).
It seems unlikely that Bank of America would trade with a multiple on
par with JPMorgan. However, it does seem reasonable that good quarterly results
could help the stock’s earnings multiple increase to its prior high of around
11.7. Should that happen, the stock would be worth roughly $38.
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