Warren Buffett Converts BoA’s Warrants to Common Shares

Warren Buffet with hand up speaking to conference audience - photo - July 2017A quick review of recent articles would reveal that we had forecasted a decline in the stock of Bank of America (NYSE: BAC) on June 19th and have expressed our interest to invest in a low or below option valid for a week. The stock was trading at about $24 at that point in time. In the days that followed, the stock fell to a low of $22.50, thereby resulting in a profit from the position held. Now, the stock has bounced back to $24 levels in past two trading sessions. On the basis of details presented herewith, we forecast an increase in the share price in the days ahead.

In the aftermath of the 2008 financial crisis, banks in the US require approval from the Federal Reserve for raising the dividend. The Fed conducts annual “stress tests” to assess a bank’s financial health. Failing to pass the stress test will result in disapproval of capital plans of a bank. The Bank of America passed the stress tests and its capital plans were approved last week. Following this, the Bank of America raised its annual dividend by 60% to $0.48 per share, from the prior $0.30 per share. The raised dividend is applicable from the third-quarter onwards. The bank also announced a $12 billion stock buyback plan.

Additionally, there was another positive news that could spur the stock upwards in the coming weeks. In August 2011, when investors became concerned about the capital needs of the Bank of America, the legendary investor Warren Buffett invested $5 billion in the form of preferred stock with a 6% annual dividend. The purchase also included warrants to acquire $700 million worth common shares at a price of $7.14 each. Commenting on the dividend boost, Buffett stated that it would encourage him to go for a swap of preferred shares to the common shares. If the swap is accomplished, the total stake would be now worth $16.7 billion. Such a swap would also make him the largest shareholder of Bank of America. Furthermore, it would signal his confidence in Bank of America’s CEO Brian Moynihan. The Bank of America, under Moynihan, has spent about $70 billion since the global financial crisis to settle legal and regulatory issues, and gain confidence of investors. A majority of the amount was spent on acquisition of Countrywide Financial Corp ad Merrill Lynch  Co. Thus, considering these positive developments, we expect a rally in the share price.

The price chart indicates consolidation of the stock at 23 levels. The MACD histogram has turned positive. Furthermore, the stochastic oscillator is ascending. Thus, we can expect the share price to appreciate further.

Bank of America - Technical Analysis - 3rd July 2017

In order to capitalise on the forecasted rally, we wish to acquire a call option offered by one of our preferred binary brokers. A strike price of about $24 and option expiry date around July 11th is preferred for the trade.

Disclaimer: The trading analysis offered here is our opinion. It is not provided as trading advice, merely an indication of our trading plan. We cannot guarantee success and we encourage traders to incorporate a strong money management strategy to limit losses. Please use this article as part of your own research before formulating strategies prior to trading.