The election of Donald Trump has certainly been a nice gift for shareholders of Wells Fargo & Co (NYSE:WFC). Wall Street is betting that there will be a boost from fewer regulations — such as with the paring back of Dodd-Frank — and stronger economic growth. Although, the biggest boost is likely going to come from higher interest rates. Because of all this, WFC stock has gained an impressive 28%.
Granted, the gain is not as large as Bank of America Corp’s (NYSE:BAC) sizzling 49%. But then again, the return on Wells Fargo stock is still on par with other megabanks like JPMorgan Chase & Co. (NYSE:JPM) and Citigroup Inc (NYSE:C).
While all this is great, the party could easily come to an end. And Wells Fargo stock looks to be the most vulnerable to a correction.
More Trouble Ahead for Wells Fargo Stock?
Of course, the fact is that the company has taken a big hit to its reputation because of a wide-ranging scandal, which involved the creation of over two million unauthorized accounts since 2011. As a result, the CEO stepped down and WFC agreed to pay $185 million in fines to the Consumer Financial Protection Bureau and the city of Los Angeles. There are also ongoing investigations from the Department of Justice and the Securities and Exchange Commission.
It’s true that the financial impact may not necessarily be large, say a few hundred million. This is certainly chump change for a company of the scale of Wells Fargo, which sports a market cap of more than $290 billion. What’s more, the euphoria of the rally in bank stocks has made the scandal seem kind of trivial.
Yet this could be a big mistake for investors in WFC stock. Keep in mind that the company’s board is expected to announce its findings about the scandal in April. And there may be other negative headlines from the various governmental investigations.
Interestingly enough, there are already some signs that the scandal has taken a toll. Let’s face it, customers have quite a few choices when it comes to their banking activities.
So just take a look at the most recent earnings report for WFC. In the quarter, net income fell by 6.4% to $4.87 billion, or 96 cents a share. This not only missed the Street expectations by 4 cents but also was the fifth straight drop in quarterly profits for Wells Fargo stock.
But there were some other troubling metrics. In November, the number of new checking account openings dropped by over 40% and there was a 45% decline in credit card applications.
Bottom Line on WFC Stock
The good news is that the new CEO of WFC, Tim Sloan, has wasted little time in making changes. There have been firings of top officials and even the disgorgement of bonuses.
Such efforts are definitely required, and they will help get the company back on track. But in the short-term, there will inevitably be higher costs and more distractions. If anything, such factors may wind-up offsetting some of the benefits of Trump’s looser regulations. Essentially, Wells Fargo will be imposing tougher regulations on itself!
Besides, the run-up in the stock appears to have already discounted much of the positives. Consider that this is the take from Credit Suisse analyst Susan Roth Katzke. According to her most recent report, she believes that the fair value for WFC stock is $56 a share, which compares to the current market value of $59. And she is not alone. Note that the consensus price target is at $58.
So given the stretched valuation and the potential adverse effects of the scandal, it’s probably best to take profits on WFC stock now.
Tom Taulli runs the InvestorPlace blog IPO Playbook and is the author of various books, including Taxes 2017: Saving A Bundle. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
