I still see some upside in bank stocks as a group, and that goes for Wells Fargo & Co (NYSE:WFC) as well. Wells Fargo is still dealing with the fallout from its “fake account” scandal and a number of other missteps. WFC stock has struggled as a result, at least until recently.
As of late November, WFC basically hadn’t moved in almost three years. But a recent sector-wide breakout has pushed Wells Fargo stock to an all-time high.
The move makes some sense. Wells Fargo itself is working through its troubles. As bad as the headlines have been — and they’ve been ugly on occasion — Wells Fargo hasn’t seen a steady stream of customers leaving for rivals.
More importantly, there’s been a ton of good news for the sector since the election. Interest rate expectations have risen, helping spreads, and 2018 rate hikes should add further help. Corporate tax reform will benefit WFC earnings going forward and may also boost demand in real estate and commercial lending. And the economy looks strong, always a tailwind for a macro-sensitive sector.
I do think WFC stock will continue to rise. But I strongly believe that its peers will gain more.
Wells Fargo Stock Isn’t That Cheap
Wells Fargo stock does look cheap. Even after the recent run, WFC is trading at less than 12x 2019 EPS estimates. The price-to-book ratio is about 1.75x, having recovered to 2014-2015 (i.e., pre-scandal) levels, but still well below the often 3x+ valuation seen last decade.
And the dividend yields 2.4% and likely will see a big bump later this year, with Wells Fargo on Wednesday announcing an expansion of its share repurchase authorization as well.
JPMorgan Chase & Co. (NYSE:JPM), to my eye, has been the best performer in the sector since the crisis and has the best CEO in Jamie Dimon. Its valuation is basically equivalent. Valuations are similar on the price-to-book front as well.
WFC and JPM both trade just above 1.7x. Citigroup Inc (NYSE:C) — who had the worst performance during the crisis and the longest road back — trades at just 1.1x. Some gap between the two companies makes sense, but WFC’s multiple is more than 50% higher than that of Citigroup.
On its own, WFC does look cheap. Relative to peers, not so much. And so it’s hard to see why an investor would pick WFC over those peers.
Is WFC Stock the Best Play?
Certainly, there’s a case to be made for all three of those peers. Citigroup has the most work left to do but also the most potential benefit if it succeeds. The stock is cheaper as well. Simply getting its valuation back toward its peer group would imply 8% upside, at least.
JPMorgan is the biggest winner in credit cards, as Luce Emerson pointed out back in August. It’s coming off yet another impressive earnings report as well. BAC’s diversification, credit performance and room for improvement in consumer lending and trading revenue support the bull case for that stock.
In that context, WFC just doesn’t look impressive. The fallout from the fake accounts scandal hasn’t been as bad as feared, but there is fallout. The company is reserving another $3.25 billion for liabilities at a time when its peers finally have settled the billions of dollars in penalties from bubble-era actions.
There is the counterintuitive argument that those struggles support the bull case for WFC. After all, the company has a large base of customers to recapture, and room to improve as the scandal’s impact fades. But once again, Citigroup offers a similar “room for improvement” case at a cheaper price.
And for investors interested in higher-risk, higher-reward plays benefiting from macro strength and rate hikes, there are smaller regional banks or even more aggressive plays like LendingClub Corp (NYSE:LC) or On Deck Capital Inc (NYSE:ONDK).
Wells Fargo does have the highest dividend of the four big banks, but that aside, I’d simply rather own another stock in the space. My choice would be BAC, but investors who see the sector differently might look to C or JPM.
The problem is that the case for WFC just is a lot tougher to make. And however the big banks perform over the next 12-24 months, I have a hard time believing that WFC will be the biggest winner.
As of this writing, Vince Martin has no positions in any securities mentioned.