Top stock pick of all 79 holdings in the Financial Select Sector SPDR is Bank of America (NYSE: BAC).
During the 2008-2009 financial crisis, BAC was one of the hardest hit banks. As customers fell behind on their loans and investments soured, BAC almost sank. But thanks to $45 billion in government bailout funds, this banking giant was able to stay afloat.
Now, the tide seems to be turning for the better. In December 2009, BAC announced it had repaid its government loan. And earlier this month the company reported its first profit since the summer of 2009. Revenue and earnings both surpassed analysts' expectations.
BAC is one of the largest financial institutions in the world, based on assets and market capitalization. The company is also the largest mortgage servicer in the United States.
Technically, BAC is showing signs of a bullish turnaround. In February 2009 -- a month before the market's bottom -- BAC hit a low of $2.52 per share.
However, the stock has made an enormous recovery since, gaining nearly +630% to date. With resistance several dollars away, I think BAC can go higher still.
From August 2009 until March 2010, BAC traded in a narrow range between resistance at $17.40 and support around $14.10.
But in late March of this year, BAC inched past resistance, bullishly breaking nine months of rectangular consolidation and a small ascending triangle pattern that had begun forming in February.
Corresponding with this breakout, the rising 10-week moving average crossed over the 30-week moving average, a bullish technical signal. Old resistance should now act as new support, so risk appears to be limited.
The stock is also
The measuring principle for the rectangle (which is calculated by adding the height of pattern to the breakout point) indicates the stock should reach a minimum target of at least $21.50. This level is near where the upper channel line intersects.
However, with minimal historical resistance at this level, it is also possible BAC could climb to near $25 before encountering major resistance. The indicators are mostly bullish. MACD is on a buy signal. The MACD histogram is strengthening in positive territory.
RSI has been on an uptrend since March 2009. At its current level of 63.30, RSI is above its rising trendline and is not yet overbought. Stochastics indicates BAC has become overbought. But, strong stocks can stay overbought for long periods of time.
In the coming years, BAC expects modest growth. Annual 2010 revenue is expected to increase to $120.6 billion, up +0.8% from $119.6 billion in 2009. By 2011, analysts project revenue will grow another +2.5%, to $123.6 billion.
And as the economy improves, analysts project BAC will see strong future earnings growth. Full-year 2010 earnings are expected to be $1.00, compared with -$0.29 in 2009. By 2011, analysts predict earnings should increase another +92%, to $1.92.
In addition to growth potential, BAC is attractively valued on several measures. It has a forward price to earnings ratio (P/E) of 9.5. In comparison, competing, large-cap U.S. bank Wells Fargo has a forward P/E ratio of 11.6. BAC also has an attractive price to book ratio (P/B) of 0.83. In comparison, WFC's is 1.68.
Given the company's attractive valuation, combined with earnings growth potential and bullish technicals, I plan to go long on this banking stock. Because I don't want to enter a long position if the market were to weaken, I am placing my buy-on-stop order somewhat above current prices, at $18.65.
My target is $24.95, just below an important shelf of resistance. My stop-loss is $16.49, below where the major uptrend line would have been broken and a shelf of lateral support violated. The risk/reward ratio of the trade is 2.9:1.
Action to Take: Based on the analysis above, here's how I plan to trade BAC:
Place a buy-on-stop order at $18.65, good until Friday, May 21
Set an initial stop loss at $16.49
Target price = $24.95
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