A couple of weeks ago, I wrote about the fundamental problems that are weighing down Bank of America (BAC) stock. The biggest issue is that banks continue to suffer from compressed net interest margins (NIMs) in such a low-interest rate environment.
Low margins mean little room to grow profits, which is the primary consideration for any long-term investor. However, if BAC’s NIM and earnings have stagnated, one would expect the share price to do the same.
However, as the chart below indicates, even though BAC’s EPS is at its highest level since the financial crisis, Bank of America stock has tanked 28% in 2016.
A sell-off of this magnitude goes far beyond “stagnation,” so there must be something more at play with Bank of America stock than just the performance of the core business.
Sell the News…and BAC Stock?
The first source of selling pressure for BAC stock is likely a “sell the news” reaction to the Federal Reserve’s modest first interest rate hike in December. Let’s face it: After years of speculation about a rate hike, the December decision caught very view people off guard, which was likely Fed’s intention.
That said, a highly-anticipated piece of news such as this often marks a short-term top in a stock. Naïve investors buy the stock ahead of the news anticipating that the news itself will propel the stock higher. However, by the time the news is finally official, there are no more buyers left, and disappointed traders are quick to dump the stock, driving share prices down. There was likely plenty of post-hike “sell the news” trades in BAC stock.
Investors Fear the Unknown
Post-news selling can account…
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