Investors who expected Wells Fargo & Co. (NYSE:WFC) to be punished for last year’s false account scandal have to squint hard to see the damage. Over the past six months, WFC stock is up 26% despite seeing its CEO resign and clawing back bonuses previously given other top executives.
But the gains are all in line with a run on big bank stocks that has taken Citigroup Inc. (NYSE:C) up 31%, JP Morgan Chase & Co. (NYSE:JPM) up 37% and Bank of America Corp. (NYSE:BAC) a whopping 62%, based on the assumption that rising interest rates will mean fatter profits down the road.
Those gains have yet to materialize, at least at Wells Fargo. Net income for the quarter ending in December was down 9%, to $5.244 billion, and even the asset base fell slightly to $1.930 trillion.
Love the sinner and hate the sin.
The Problem Is Relative
The bigger problem, which recently moved our Tom Taulli to say Wells stock is “no longer a good bet” is that the bank’s reputation has taken a massive hit and not all the shoes have dropped on the scandal.
Federal prosecutors are still asking questions, the company’s investment arm faces charges of sex discrimination, and the plaintiffs’ bar is trolling mortgage customers, seeking out those who may have been charged extra fees when their paperwork was delayed. Recent price action may be due more to a short squeeze than any improvement in the business.
Executives are still being fired over the scandal, the community bank unit is being shaken up under new female leadership, and Prudential Financial Inc. (NYSE:PRU), facing probes of its own relationship to the scandal, wants Wells Fargo to pay its costs.
The rising value of banks overall has taken Wells Fargo’s price to book ratio up from 1.30 to 1.68, and that’s the still the highest number among the big banks, but given the bank’s problems that may be a bearish sign for the stock.
The WFC Bull Case
Our Serge Berger recently issued a “breakout alert” for the stock, to the upside, and there is a bull case to be made for it. The fundamentals of the bank are sound, and it has a bigger return on equity than the other big banks. The bank’s big branch system means it is geared to the Main Street banking renaissance that the administration wants from the economy.
Wells is entering new markets, like the robo-advisor business, in which investment advice is automated to low-balance customers, and a recent survey by the bank shows that economic optimism is surging to levels not seen since before the last recession. If you believe in the administration’s rosy view of the economy, Wells Fargo is well positioned. If you believe the administration is going to let boardroom crimes slide, Wells Fargo stock should catch up with its peers.
The Bottom Line on WFC Stock
After months of watching the scandal’s drip-drip-drip last year, I sold out of my own Wells Fargo position before the recent run-up.
That might not make me the right person to advise on whether you should buy Wells Fargo stock today. But there are a lot of banks where you can invest, banks that have done just as well as Wells Fargo over the past six months, and with better reason.
I especially like the regional banks right now, like SunTrust Inc. (NYSE:STI), up 35% over the past six months, and Regions Financial Corp. (NYSE:RF), up 58%. I suspect they’re just as likely to be the recipients of a local banking boom as the big boys.
Besides, the smoke hasn’t yet cleared at Wells Fargo. That’s a risk I don’t feel like taking yet.
Dana Blankenhorn is a financial and technology journalist. He is the author of the sci-fi novella Into the Cloud, available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this story.
