Wells Fargo (WFC) is one of the world’s biggest banks. It’s been dogged by regulatory issues, and the coronavirus crisis delivered another blow, sending Wells Fargo stock sharply lower.
But with the firm snapping a negative earnings streak, and showing progress toward eventually ending Fed limits on its size, is WFC stock a buy right now? Here is what fundamental and technical analysis says.
Wells Fargo is one of the Big Four U.S. banks, along with fellow behemoths Bank of America (BAC), Citigroup (C) and JPMorgan Chase (JPM).
Founded in 1852, Wells Fargo’s history dates back to the California Gold Rush. Henry Wells, the first president of American Express (AXP), and William G. Fargo, its vice president, decided to form their own company. They made the move after American Express, at the time an express mail firm, balked at the idea of westward expansion.
These Businesses Keep Stagecoach Rolling
Wells Fargo’s Community Banking business serves consumers and small businesses, offering checking and savings accounts as well as credit and debit cards. It also makes home loans, auto loans, student loans and small business loans. This is a key step towards ending Fed limits on its size
Wholesale Banking provides business banking services to mid-market and large corporations. Such firms generally have annual sales of $5 million and above. It specializes in serving the international needs of U.S. companies and the U.S. needs of multinational corporations.
Its Wealth and Investment Management business provides wealth management, investment and retirement products. Services include asset management, investment services, portfolio analysis and monitoring.
Opportunity Ahead For WFC Stock
Wells Fargo stock was given a boost after it was reported that Federal Reserve officials “privately signaled” that they accept Wells Fargo’s proposal to repair its risk management and governance practices.
The Fed in 2018 placed limits on Wells Fargo’s size in the wake of the scandal, in which the bank for years created millions of phony accounts in consumers’ names in an effort to hit sales goals. The scandal led to scrutiny of some of Wells Fargo’s other businesses, executive departures and settlements.
Over that time, Wells Fargo stock has lagged other bank stocks. And Wells Fargo has more work to do before the Fed’s asset cap can be lifted.
In addition, Wells Fargo announced it is selling its asset management business to private-equity firms GTCR and Reverence Capital Partners for $2.1 billion. The business manages more than $603 billion in assets. It was previously reported that Wells Fargo was seeking more than $3 billion for the unit.
Wells Fargo Earnings
In April, Wells Fargo posted EPS of $1.05, an increase 77% vs. the same period a year ago. It also crushed Wall Street views for earnings of 69 cents cents per share. The bank reported revenue of $18.06 billion, which was also much better than analysts expected.
Consumer banking revenue was flat at $8.65 billion. Commercial banking revenue fell 12% to $2.2 billion. Corporate and investment banking revenue grew 7% to $3.6 billion. Wealth management revenue rose 8% to $3.5 billion.
The strong report snapped a worrying trend for Wells Fargo stock: Earnings per share had declined vs. a year earlier in the previous six quarters.
Wells Fargo and its peers had been building up reserves as a cushion to cover loans vulnerable to default in light of the coronavirus crisis. Shut downs and unemployment made this a problem, putting business loans, auto loans and mortgages at risk. However the development and distribution of vaccines, and the reopening of states, should help.
Loan defaults are one issue, but narrowing interest spreads is another challenge. Banks rely on the spread between short-term and long-term rates for profit. Any changes in banks’ net interest income flows through to their bottom-line profits.
Wells Fargo Stock Analysis
Wells Fargo is extended from a four-weeks-tight pattern with a 41.64 buy point. This is usually used as an add-on opportunity. Aggressive investors could have also used this as an opportunity to buy its shares for the first time.
The stock is currently trading above its 50-day moving average, which is a bullish sign. Good recent performance has won it a spot on Leaderboard.
WFC stock was previously an IBD Stock Of The Day after it cleared a 35.20 entry of a short consolidation. Those who bought the stock then have made solid gains.
Wells Fargo stock shed 44% of its value in 2020. This is despite the fact it went on a strong run from early November through to the end of the year. At one point it had plunged to its worst levels in 11 years after a downtrend hit the stock in early June. It sank even lower than its coronavirus crash lows.
But its recovery in 2021 is noteworthy, with WFC posting a gain of around 55% so far this year.
The relative strength line for Wells Fargo stock has generally been spiking since November, though it has levelled off of late. It had previously sunk to levels not seen since 1990. The RS line still has a fair way to go before it reaches the where it started 2020. WFC stock has been underperforming the broader S&P 500 index, especially since the 2008 financial crisis.
MarketSmith analysis shows WFC stock sold off in above-average volume following its weak Q4 report, but then it bounced back. It was then snapped up in massive volume when it posted its strong Q1 earnings.
Big bank stocks generally have trouble outperforming the S&P 500 index over the long run, but Wells Fargo stock has been a notable laggard even among its peers. It is important it maintains its improving performance going forward.
WFC Stock Makes Big Improvement In Key Rating
WFC stock currently has a strong, but not ideal, IBD Composite Rating of 82. This puts it in the top 18% of all stocks tracked. It has taken major strides in improving in this key metric in recent months.
The Stock Checkup Tool shows Wells Fargo earnings are lagging its strong stock market performance. Its Relative Strength Rating is currently 87 out of 99. This means WFC is in the top 13% of stocks in terms of stock market performance over the past 12 months.
While its EPS Rating has improved to 51, average growth over the past three quarters is still well shy of the 25% growth sought by CAN SLIM investors over this period
Analysts see some light at the end of the tunnel for Wells Fargo however. They expect Wells Fargo’s full year earnings to climb by 184% to $3.81 in 2021. However this is seen declining by 7% to $3.52 in 2022.
Despite the projected growth, earnings will still be lagging the $4.53 full-year EPS it made in 2019.
Warren Buffett Losing Confidence In WFC Stock
One big name investor who lost patience with Wells Fargo stock is legendary value investor Warren Buffett.
At the moment, Berkshire Hathaway (BRKB) now holds just 675,054. That’s is a dramatic reduction on the 323.21 million shares it held just a few quarters ago.
The Oracle of Omaha has been gradually hacking away at his stake in the banking giant. Berkshire Hathaway slashed its stake in Wells Fargo by nearly 15% in the last quarter of 2019.
His remaining position is now one of the least valuable holdings in the legendary value investor’s portfolio. The list is topped by Apple (AAPL), Bank of America (BAC), Coca-Cola (KO) and American Express (AXP).
WFC’s biggest institutional backer is currently index fund giant Vanguard. It owns 7.5% of its stock.
Big money is showing rising confidence in Wells Fargo stock. It holds an Accumulation/Distribution Rating of B-, which represents moderate buying. In total, 43% of its stock is now held by funds. CAN SLIM investors prefer to back stocks which are heavily backed by big money.
Analyst Rates Wells Fargo Stock
CFRA research director Kenneth Leon is rating WFC stock a hold, with a price target of 46.
“Despite lagging peers, we think WFC should benefit from favorable industry trends, and management’s focus on execution has improved,” he said in a research note. “We expect 2021’s second half to show improved loan activity and higher net interest income than the first half.”
Leon believes Wells Fargo’s future performance will be driven by a rebound in commercial loan originations as well as personal and small business loans.
The analyst has also been impressed by the new leadership at the company, which he believes “will put the bank on the right path to regain customer trust.”
Is Wells Fargo Stock A Buy Now?
Investors should be mindful that Wells Fargo’s growth in earnings per share is well short of the 25% benchmark IBD research finds to be key to winning stocks.
Nevertheless, the excellent performance of Wells Fargo stock in 2021 is hard to ignore. In addition, it turned an important corner by posting an earnings increase after a string of declines.
The firm is also making progress as it tries to get the Fed to rescind the current limits on its size. This could help unlock further stock gains in the future.
However the stock is now extended from a buy zone. It would be wise for investors to wait for a new entry opportunity to emerge.
Bottom line: Wells Fargo stock is a not a buy at the moment, but WFC stock is worth adding to one’s watchlist. This will ensure you are ready to pounce once a new proper entry point emerges.
Investors looking for market leaders are also urged to check out IBD Stock Lists, including the IBD 50 list of top performing stocks.
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