Wells Fargo & Co (NYSE:WFC) received the first of what should be more than one upgrade Monday. This should help solidify a floor under WFC stock after the phony accounts scandal.
Analysts at R.W. Baird couldn’t watch the steep selloff in Wells Fargo stock for long before it turned into too good a bargain to ignore. Anytime a stock falls as much as WFC in such a short period of time, you have to listen for the sound of cannons and look for blood in the streets.
Hey, at some point, even the ugliest situations can be overly discounted by the market.
That’s clearly the case with WFC stock. That’s not to soft-pedal the enormity of what happened there. It’s just that at some point the punishment doesn’t fit the crime.
That’s why R.W. Baird’s David George raised his rating on shares to “Outperform” (buy, essentially) from “Neutral” on Monday.
With a target price of $50, the analyst sees implied upside of about 11% in the next year or so. As George wrote in a note to clients:
“The stock has gone from loved to loathed in two to three weeks, and we believe the selloff creates a good relative buying opportunity.”
He’s absolutely right. The size and scope of the bank’s illegal sales practices is indeed jaw dropping. Long known as the “cleanest” of the money-center banks, Wells Fargo may never get its reputation back in quite the same way.
WFC Stock Pays Too High a Price
Going strictly by the numbers, however, the drop in WFC has become an emotional trade, not a rational one. Shares have tumbled roughly 10% since the beginning of the month. That represents about $25 billion in market value on a revenue loss of $2.6 billion, plus $185 million in fines.
Another point the analyst makes isn’t getting enough attention either. The drop in WFC stock has made the yield on the dividend a whopper for a bank stock. Wells Fargo currently sports a yield of 3.35%. For comparison, JPMorgan Chase & Co. (NYSE:JPM) yields 2.92%, while the S&P 500 yields just 2.14%. George notes that such a generous dividend should limit downside from here.
WFC is going to have to carry the taint of this scandal around for some time. That may depress WFC’s premium valuation vs. its peers, but it still deserves one. There’s a reason why it’s Warren Buffett’s favorite bank.
No one is minimizing what happened here. Thousands upon thousands of sales people opened millions of accounts in customers’ names without their knowledge. The analyst acknowledges this is a “black eye” for the bank. He just thinks the pessimism should peak in the coming days. At some point, a more sober view of valuation should take hold. That sounds about right.
Don’t be surprised if other analysts upgrade shares to buy on valuation — and that generous dividend — in the days and weeks ahead.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.