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Financial Should Post Solid Gains

David Becker
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Financial stocks are hitting their stride as a sector rotation out of consumer discretionary and technology stocks and into financials could replace a market correction and instead create a market rotation. The decline in the long end of the Treasury bond market relative to the short end of the interest rate curve could help financial gain traction. The steepening of the debt term structure reflects continued moderate growth, while yields increase based on sentiment.

Since May 22, 2013 when Feb Chairman Ben Bernanke first mentioned the potential tapering of the current bond purchase program and reduce the quantity of bonds purchase per month, bond prices have been under pressure. This has put pressure on financials but the recent easing of rates has allowed financials to benefit.

In October, Bank of America reported quarterly earnings and revenue that beat Wall Street’s expectations, which was helped by favorable credit conditions, and lower expenses. BAC posted Q3 earnings excluding items of 20 cents per share, compared to having made no profit in the comparable year-ago quarter. Revenue was $21.7 billion, compared to $20.43 billion a year ago. Analysts had expected Bank of America to report a profit of 18 cents per share on $22.03 billion in revenue, according to a consensus estimates.

Earnings per share climbed more than 1900% quarter over quarter, while the 3-year growth was up more than 107%. The growth rate for sales was actually down 12%, while the 3-year growth rate for sales was down 1%. The profit margin for BAC was 8.3% while the dividend yield is a moderate 0.3%. The company holds a debt to equity ratio of 116%, while the PE ratio is a modest 17.
The technical picture for BAC shows a stock that has moved substantially, but their remains plenty of upside. Momentum is strong with the MACD printing in positive territory. The only caveat is the RSI printing near 78, which is well above the oversold trigger level of 70.

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