The reason for that is a scandal, centered in phony accounts created by employees for internal incentives, that first came to light a year ago and has only mushroomed bigger.
The scandal cost CEO John Stumpf his job and, eventually, his reputation. Timothy Sloan was promoted to CEO and a board shake-up occurred, but the hits keep coming. WFCnow estimates 3.5 million phony accounts were created this decade, and it now also faces charges it closed accounts unilaterally when depositors most needed their money.
The bank’s defensive attitude hasn’t changed, either. It wants to force complaining consumers into arbitration and it is paying fat fees to lawyers rather than settling class-action lawsuits.
Cheap Bank, Good Bank?
All this bad news has made Wells the cheapest of the big banks, with a price-to-earnings multiple of just 12.3, compared with 14.1 at Bank of America. Were it not for the updraft lifting all bank stocks after the 2016 election, the stock would be down.
The iShares Dow Jones US Financial Svc. (ETF) (NYSEARCA:IYG), which focuses on the U.S. financial services industry, is up 25% since the election; WFC stock is the exchange-traded fund’s third-largest holding, at 8.4% of the roster, behind JPMorgan Chase & Co. (NYSE:JPM) and BofA.
But a stock that’s cheap, for whatever reason, can be an interesting play for options traders. InvestorPlace’s Tyler Craig earlier this week suggested buying puts, betting the stock’s price will stay below $50 per share. WFC stock closed down on Thursday at $49.68, and after-hours trading show the shares continuing to slip.
The problem is that, as with an infection that can’t be healed until it’s completely cleaned out, the newly discovered phony accounts mean Wells’ disease rages on. Jim Cramer has called Wells “a rogue bank,” and Berkshire Hathaway Inc. (NYSE:BRK.A) chairman Warren Buffett summed it up with an aphorism, “there’s never just one cockroach in the kitchen when you start looking around.”
Elizabeth “Betsy” Duke — set to take the board chair January 1 — is a former Federal Reserve governor who has only been on the Wells board since early 2015 and expresses confidence in Sloan, a longtime Wells officer. While she’s being sold to the media as a “small town banker” and trailblazing woman, she’s not a boat rocker. Now that the scandal has reached the bank’s board room, with Vanguard voting against re-electing three of her colleagues, she needs to rock some boats, or at least be seen as doing so, for the stock to rise.
Time to Buy WFC Stock?
The best time to buy a stock is when everyone is shouting “sell”; the best time to sell when everyone is screaming “buy”. So far, only three of Wells’ 32 analysts are saying sell WFC stock, while 12 have it on their buy lists. What they see is a bank that is, with $1.93 trillion in assets, too big to fail; that is, a company almost doomed to get its act together. The bank’s operating results are not suffering at all, even as its reputation lies in tatters.
Thus, shareholders who are suing the bank over the scandal may not have much of a case. There is a lot of smoke surrounding Wells Fargo but, in terms of operations, not much of a fire.
InvestorPlace writers, seeing its continued performance, have been suggesting that it’s time to buy. Serge Berger has suggested repeatedly that the stock’s weakness can be a good thing for your portfolio.
In the long run, Serge is right. Wells will get its act together in time. Wells will have a turnaround like that of Bank of America. But it is unlikely to be sudden, and is unlikely to be huge, because despite all the angry words, and despite all the scandal, WFC stock is still where it was when the scandal hit.
Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at firstname.lastname@example.org or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this article.