Earnings season begins to pick up steam next week, and beleaguered banking concern Wells Fargo & Co (NYSE:WFC) will enter the earnings confessional at the end of the week on Friday.
Prospects for improved investment revenue from a looming Federal Reserve rate hike have been overshadowed by Wells Fargo’s shady sales practices and subsequent Senate investigation.
What’s more, local governments are now getting in on the act and could be imposing their own sanctions, potentially impacting WFC stock.
But most of this negativity has already been factored into Wells Fargo’s backdrop. The reemergence of the customer accounts scandal saw WFC stock plunge over 10% in September.
Wells Fargo stock breached former support near $44-$45 as a result, but the shares have already begun to bounce back — mainly on the potential for higher investment unit revenue due to a potential Fed rate hike.
As a result, WFC stock’s post-earnings reaction could boil down to guidance and any fallout from recent attention from Capitol Hill.
As for expectations, Wall Street is expecting a profit of $1.01 per share from Wells Fargo, with revenue seen inching 1.4% higher to $22.19 billion. Even EarningsWhispers.com is a bit restrained on its forecasts, with Wells Fargo’s whisper number arriving just a penny higher than the consensus at $1.02 per share.
Turning toward the sentiment backdrop, Wall Street remains considerably bullish when it comes to WFC stock. According to Zacks data, Wells Fargo has earned 15 buy ratings, compared to just six holds and four sell ratings. Furthermore, the 12-month price target of $50.54 represents a premium of about 11.5% to Friday’s close.
Click to Enlarge In the options pits, WFC stock options traders are quite a bit more bearish on the shares. Currently, the October put/call open interest ratio rests at a bearish-leaning reading of 0.83, with calls and puts in near parity. Furthermore, this ratio rises to 0.98 for the weekly October 14 series — i.e., options most affected by Wells Fargo’s earnings report.
Overall, weekly October 14 series implieds are pricing in a potential post-earnings move of about 3.7% for WFC stock. This places the upper bound at $47.01, while the lower bound lies at $43.65 from Friday’s close. A rally past $46 would put WFC back above several key moving averages, while a drop would put Wells Fargo stock at fresh annual lows.
2 Trades for WFC Stock
Call Spread: WFC stock wants to bounce back, but will Capitol Hill and local governments allow that to happen? Sanctions could be a big deal for Wells Fargo’s guidance and revenue for the coming quarters.
Still, a solid report next week combined with the potential for higher interest rates and a depressed share price make WFC an attractive bullish speculation play. Those looking to bet on a breakout for WFC stock might want to consider an Oct $46/$47 bull call spread.
At last check, this spread was offered at 27 cents, or $27 per pair of contracts. Breakeven lies at $46.27, while a maximum profit of 73 cents, or $73 per pair of contracts, is possible if WFC stock closes at or above $47 when October options expire.
Put Sell: Alternately, if you’re looking for a more conservative play on WFC stock, a weekly Oct 14 series $42.50 put sell has potential. At last check, this option was bid at 7 cents, or $7 per contract.
As usual with a put sell, you keep the premium as long as WFC stock closes above $42.50 when weekly October options expire at the end of this week. On the downside, if WFC trades below $42.50 prior to expiration, you could be assigned 100 shares for each put sold at a cost of $42.50 per share.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
