3 Reasons Bank of America's Stock Rose 7.6% in April

By Markets Fool.com

Image source: iStock/Thinkstock.

Continue Reading Below

Bank of America turned in one of the best performances in April compared with other big bank stocks, rising by 7.6%. While it's impossible to pinpoint exactly what caused its shares to climb this much, there are three likely culprits.

1. Primed for a rebound
The first is that Bank of America's shares were primed for a rebound. Bank stocks have struggled since the end of 2015, with Bank of America's shares off by nearly 24% since the middle of last December.

BAC data by YCharts.

There were multiple reasons for investors to be concerned. The Chinese economy seemed to be teetering on the brink of a crisis. Britain announced that it will hold a referendum to decide whether to stay in the European Union. Interest rates are still woefully low. The prolonged decline in oil and gas prices are pressuring borrowers in the energy industry. And multiple banks, including Citigroup and JPMorgan Chase, had forewarned that first-quarter trading and investment banking revenues were trending materially lower than the year-ago period.

Continue Reading Below

This pessimism caused bank stocks to plummet, which in turn laid the groundwork for a recovery in April, after Bank of America and others reported better-than-expected first-quarter results.

2. Earnings beat
One side effect of these well-publicized concerns is that they led analysts to repeatedly drop their profit expectations for the nation's biggest banks in the lead-up to first-quarter earnings season.

In Bank of America's case, analysts had expected it to report earnings per share of $0.20 for the three months ended March 31. Consequently, when the $2.2 trillion bank announced earnings per share of $0.21, the market responded by sending its stock higher.

Bank

Q1 2016 EPS -- Actual

Q1 2016 EPS -- Expected

Beat/(Miss)

JPMorgan Chase

$1.35

$1.26

7.1%

Bank of America

$0.21

$0.20

5%

Wells Fargo

$0.99

$0.97

2.1%

Citigroup

$1.10

$1.03

6.8%

Data source: The Wall Street Journal.

But this shouldn't be interpreted as evidence that Bank of America had a good quarter. Indeed, by most accounts it was dismal. Its top line revenue dropped by 6.7% on a year-over-year basis. And its return on assets came in at a mere 0.5%, which is roughly half as profitable as a reasonably well-run bank should be.

3. Innate volatility
Last but not least, Bank of America's shares tend to be more volatile than the typical stock, irrespective of the bank's fundamental performance. You can see this by looking at its beta, which measures how much a particular stock moves in relation to the broader market.

  • If a stock has a beta over 1.0, that means it fluctuates more than the broader market on an average day.
  • If a stock has a beta equal to 1.0, that means its moves on average mirror the broader market.
  • And if a stock has a beta below 1.0, that means it moves less than the market on a typical day.

Bank of America's beta is 1.8, according to YCharts.com. On any given day, in turn, investors can expect shares of the nation's second biggest bank by assets to move 80% more than the S&P 500. If the S&P 500 increases by 1%, Bank of America's shares will on average be up by 1.8%. (The same is true on the downside.)

Given this situation, it should come as no surprise that Bank of America's shares not only outperformed the broader market in April, which ended the month higher, but also that their rise outpaced most other big bank stocks, as the average large bank has a beta of 1.4.

The article 3 Reasons Bank of America's Stock Rose 7.6% in April originally appeared on Fool.com.

John Maxfield owns shares of Bank of America and Wells Fargo. The Motley Fool owns shares of and recommends Wells Fargo. The Motley Fool has the following options: short May 2016 $52 puts on Wells Fargo. The Motley Fool recommends Bank of America. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.