Bank of America (NYSE: BAC), like most Banks, is laying the groundwork for a 2021 recovery. Buffett still stands firm by the company, but hedge funds are beginning to exit. Who is right? The future looks bleak for the coming months, but the long-term future is bright. (opinion not advice) This article looks to breakdown what the smart money, options chain, and financials are saying about the Bank of America stock forecast for 2021.
Table of contents
- What does the smart money say?
- Are BAC options for 2021 bullish or bearish?
- Is BAC financially healthy?
- Summary – YIG Takeaway
Bank of America stock forecast – smart money?
To a certain extent, the smart money is saying suggesting a short-term bearish correction. Analysts and price targets remain optimistic, which might make it difficult to see what’s happening under the surface. For example, 14 out of the 22 Wall Street analysts covering BAC have a buy rating. Also, the price target consensus is $29.50 (15/10/2020), which would translate to a share price appreciation of 24.89%. Despite the analyst optimism hedge funds are exiting BAC. For example, the number of hedge funds in BAC between Q1 and Q2 dropped from 94 to 91. To add insult to injury, 91 is the lowest number of total hedge funds in BAC over the past five years. It is crucial to note hedge fund positions change quarterly through SEC filings. Contrast that to short-term changes in analyst ratings and price targets.
Bank of America stock forecast – Options chain
The options chain is suggesting a bearish to stagnate 2020 but a bullish 2021. For example, the volume for October 20 calls, in particular, strikes of 24, 24, and 26 is 10,995, 4,512, and 37616, respectively. Contrast that to the put volume of 10,415, 9018, and 5978 for 24, 23, and 22 strikes. In turn, you get an image where the bears are slightly winning the 2020 tug of war. However, the further into 2021 you go the volume favours the call options. Especially for the March 2021 options chain.
Bank of America stock forecast – financials
Bank of America is showing financial strength in three areas. These include forecasted earnings growth, long-term EPS growth, and its price to earnings ratio (P/E ratio or earnings multiple). Usually, investors want a low P/E ratio because there is more chance the stock is in the undervalued territory. However, low P/E multiples also indicate that future earnings are slowing. In BAC’s case, its earnings multiple is 11.2x. When comparing it to the industry average of 9.8x investors can interpret BAC’s P/E ratio as bullish for 2021. Because it is expected to grow earnings at a better rate than peers. Analysts are forecasting EPS to surpass its pandemic level by 2022, which supports the bullish P/E argument.
Furthermore, earnings understandably took a hit for BAC. However, analysts are projecting earnings to follow an upward trend from here on out. More specifically, BAC’s earnings are expected to grow by 47% between December 2021 to 2022, totalling $21.834 billion. The bullish earnings forecasts should thus see revenue return to a positive linear progression. However, analysts are only expecting a modest 4.4% increase in revenue over the same time period.
Despite the weight to the bullish argument, BAC still does have areas of financial concern. These include a 2021 EPS dip, low ROE, a low P/E to market comparison, and debt. While Bank of America’s P/E multiple is higher than its peers, it fails to beat the market multiple of 18.9x. Consequently, Bank of America’s earnings, and possibly share price are likely to grow at a slower rate in comparison to the market. (opinion not advice) BAC has a D/E ratio of 192% with a total of $510 billion in debt. At face value, the D/E ratio and historically high debt levels are distressing. However, BAC holds $909.4 and $55.4 billion in cash and receivables, respectively. Consequently, BAC can cover all of its debt with cash. Thus, for now, debt is palatable, but investors should watch Bank of America’s cash debt relationship in 2021.
Q3 earnings show mixed signals
Bank of America’s Q3 earnings yesterday indicated the bank’s financials are on the recovery track but still need some work. Revenue came in at $20.3 billion, which was 2.4% lower than analyst estimates of $US 20.8 billion. Not to mention, revenue was down 11% Year on Year (YoY). Also, despite net income beating estimates by 14%, they are still down 16% YoY. Therefore, BAC is improving quarterly but still has to catch up to its 2019 performance.
Summary – YIG Takeaway
Before I begin, I remind our viewers that this is not financial advice. Instead, the information above is an investment commentary from extensive research.
Overall, Bank of America is likely to pull back as we enter 2021. The fleeting hedge funds and slightly bearish options activity supports this notion. Despite the short-term pessimism, BAC should reach an inflection point for EPS and begin regaining strong earnings momentum at the end of 2021. (opinion not advice). In which case, the share price should continue its upward ascent. Considering the world expects a vaccine by April and the digital world will continue to grow the banking customer base, a BAC pullback followed by a long-term slingshot sounds relatively realistic (opinion not advice).
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The information above is not financial advice. Youth Investment Group has no liability for personal financial interests or investment decisions. You should make your own investment decisions based upon your own research and what you believe is best for you.
Written by Patrick McLoughlin, Senior Manager of YIG.