Earnings Preview: Bank of America Corp and Wells Fargo & Co

Bank of America Corp (BAC) and Wells Fargo & Co (WFC) are gearing up to report earnings tomorrow morning

Jan 12, 2017 at 11:58 AM
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This earnings season will mark a historic change, as the first wave of reports will not be kicked off by Arconic Inc (NYSE:ARNC) -- previously called Alcoa Inc before the company spun off part of its business to form Alcoa Corporation (NYSE:AA) last October. Instead, the fourth-quarter earnings season will begin ahead of the open this Friday with a round of big-name bank stocks on the schedule. Among the financial firms slated to reveal quarterly figures tomorrow morning are Bank of America Corp (NYSE:BAC) and Wells Fargo & Co (NYSE:WFC). Below we'll take a look at how traders and analysts have been playing BAC and WFC ahead of the event.

BAC is pulling back ahead of earnings, off 1.3% at $22.77 today, as the broader stock market slumps. This dip comes despite an upgrade to "buy" from "hold" at SocGen. The shares have been sitting above the supportive 30-day moving average since BAC's post-election rally ran out of steam in the $23-$23.50 region -- just over double its February lows.

That hasn't stopped traders from betting on another move higher, though. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), BAC has seen 3.66 calls bought to open for each put over the past 10 sessions. Likewise, short interest on the stock has been declining, and now represents just 1% of BAC's total float. Analysts have also been upbeat, as the large majority still call the equity a "buy" or better, without a "sell" to be seen.

In terms of earnings, it's not surprising traders seem to be expecting a positive result. After all, Bank of America Corp (NYSE:BAC) has moved to the upside in the session after reporting in five of the past eight quarters, including the last three in a row. Over this period the stock has averaged a single-day post-earnings swing of 2.3% in either direction, though options are currently pricing in a slightly wider 4.3% move for BAC on Friday.

Today's sector slump and broad-market sell-off are affecting WFC, as well. The stock is down 1.3% at $54.11, at last check, holding on to support in the $54 region. Still, the shares have already surrendered nearly 7% since hitting an annual high just above $58 in early December. Plus, peak open interest at WFC's January 55 call could create trouble for the stock as the front-month expiration approaches.

Analysts have been more skeptical of WFC than many of its fellow banking stocks -- not too shocking, given the company's relatively recent legal woes. Of 26 brokerage firms tracking the stock, 15 maintain a "hold" or "strong sell" recommendation. WFC appears to be getting back into traders' good graces, at least, with short interest levels low, and call buying picking up in recent weeks. Specifically, the security now sports a 10-day ISE/CBOE/PHLX call/put volume ratio of 1.65 -- higher than 83% of all readings from the past 12 months.

A bet on an upside move seems like a bolder play ahead of WFC's earnings, however. The stock has moved lower in the post-earnings session all but one time over the last eight quarters, with the last upside move seen in July 2015. Still, Wells Fargo & Co (NYSE:WFC) has tended to make rather small swings in the session subsequent to reporting, averaging just 1.3% over the last two years. For tomorrow, options players have so far priced in a swing of 3.2%.

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