Bank of America Stock Rises on Upgrade

Updated from 3:37 p.m. EDT

Bank of America (BAC) shares were up sharply Monday morning after an analyst said he expects the stock to rise on strong earnings and a completion of the firm's public offering.

The stock closed up 9.9% to $11.73 , after Goldman Sachs analyst Richard Ramsden upgraded it to buy and set a price target of $15, implying a potential return of 41% from the previous close. Bank stocks were rallying amid an upswing in the broad market on positive economic news and better-than-expected results from Lowe's (LOW). However, BofA shares sailed higher than most other stocks, leading most fellow components of the Dow Jones Industrial Average by a wide margin, other than General Motors (GM).

Despite that surge, Fitch Ratings downgraded BofA due to "headwinds" the company faces from weak asset quality and potential capital needs. Those were also factors that Ramsden cited as risks to his bullish view.

Ramsen estimated that BofA is about halfway through its offering of 1.25 billion new shares, the issuance of which has dragged on its share price, due to an increase in supply. Additionally, the analyst expects Bank of America to report second-quarter earnings of 25 cents per share, far higher than the average estimate of a penny per share, according to Thomson Reuters.

"Our optimism is based on another solid mortgage and capital markets quarter, given observable activity levels since March," writes Ramsden. "As confidence over [BofA's] ability to earn its way out of the cycle increases, we see the valuation continuing to shift to discounted, normalized, and diluted (DND) earnings -- our model for which generates our 12-month $15 price target."

Another factor that stands to support shares is BofA's planned exchange of preferred equity for common, which Ramsden expects to begin after the public offering is complete. Given the firm's "success" in the offering, which offered shares in portions at market prices, Ramsden says the discount to preferred investors may be greater, resulting in less dilution for common stockholders.