May 22, 2015
Old Bank's New Breakout has
Double-Digit Rally Potential
By Melvin Pasternak
One of my favorite things to see in a long candidate is a pattern of beating Wall Street's earnings estimates. After all, if a stock beats the Street consistently, it is doing many things right.
An earnings beat will often cause a stock's price to pop, and when that stock also sports a superb long-term chart, I know I have found a winner.
The Bank of New York Mellon (NYSE: BK) fits this description to a T.
In the company's past 18 quarterly earnings reports, going back to the end of 2010, it has only missed Zacks' consensus estimate three times. And it has beaten estimates more than 72% of the time. In the most recently reported quarter, announced in April, Bank of New York Mellon exceeded estimates by nearly 14%.
The financial institution has a storied history. The Bank of New York was founded in 1784 by the future first U.S. Secretary of the Treasury, Alexander Hamilton, whose portrait adorns the $10 bill. It grew steadily over the centuries and merged with Mellon Financial in 2007.
The Bank of New York Mellon describes itself as an "investments company" with a goal to "help individuals and institutions to invest, conduct business and transact in markets all over the world."
Its clients include high-net-worth individuals, investment advisors, non-profits, corporations, pension funds and other banks. It has $28.5 trillion dollars under custody and administration and $1.7 trillion in assets under management, operating in 100 markets worldwide.
It was recently named No. 1 in "The Experts" category in the 2015 R&M Investor Services Survey, which polled investment professionals. This ranking was based on BK having both the expertise and capabilities to service large, complex accounts across the globe.
For the first quarter of 2015, revenues increased 6% over the comparable year-ago period to $3.9 billion, as investment service fees were up 3% and management fees rose 1% (and a more robust 6% on a constant currency basis).
Diluted earnings per share ramped up nearly 18% year over year to $0.67, as the company was successful at cutting expenses. Management also announced plans to repurchase $3.1 billion of common stock over the next five quarters, which should help support the share price going forward.
For the full year, earnings are expected to increase 13% to $2.71 per share and another 16% in 2016 to $3.13 per share, likely spurred by an improving investment climate in the United States.
Activist investors are also putting pressure on CEO Gerald Hassell to cut staff. If he is successful at trimming the head count, expenses will drop and profits should increase further.
As I mentioned earlier, BK has a strong long-term chart with a recent breakout:
Shares began their current uptrend at just under $16 in October 2011. For over a year, they encountered significant resistance in the $23 range, but finally broke through that barrier in late 2012.
Once free of this resistance, BK rapidly advanced to around $30 in the spring of 2013, briefly retreated, and by early January 2014, advanced to $35, more than doubling from its October 2011 low. The $35 level provided round number resistance for about six months, but BK broke out of this consolidation phase to the upside and advanced to just over $40 by early fall.
From there, the stock pulled back to around $35 in October, finding support at what had been resistance. Near the end of 2014, BK made a nominal new high near $41, but again pulled back to key support at $35 by the end of the January. This pullback was significant not only in that lateral support held, but the shares also tested and held the long-term uptrend line drawn from the October 2011 low.
After a successful test of support, BK rallied sharply, completing a small basing pattern in April, breaking out on yet another earnings beat. This breakout has a minimum target of $47.54, calculated by adding the height of the pattern to the breakout level.
However, I think shares could rally to round number resistance at $50, so I am setting my target at $49.89. From current levels, this target represents a gain of 14%.
There should be reasonable support at the breakout level of $41.43, which was previous resistance. To avoid being whipsawed, however, I am using the rising uptrend line, currently near $38, to set my stop-loss. This trendline has not been violated since late 2011, and I expect it to continue to hold if tested.
BK is not a fast-moving stock, but its steady advance should deliver substantial profits for the patient investor.
The bank also pays a $0.17 quarterly dividend, for a current forward annual yield of 1.6%, which should help put a floor under shares.
Speaking of income, last week, my colleague, Amber Hestla, recommended another venerable financial institution that recently boosted its dividend by 400%. But she found a way to make nine times more in income on the stock --- without having to buy the shares.
There's a chance she'll buy the shares down the road, but if so, it'll be at a nearly 10% discount to where they traded when she made the recommendation. Getting paid nine times the amount you would get from the dividend alone and the chance to buy shares at a discount may sound too good to be true, but Amber is making trades like this every week. And so far she has a perfect track record, closing 85 profitable trades in a row. I urge you to take a few minutes to check out how she's done it.
Recommended Trade Setup:
-- Buy BK at the market price
-- Set stop-loss at $37.95
-- Set price target at $49.89 for a potential 14% gain by early 2016
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