Don’t Buy Into the Wells Fargo Stock Buyback Hype

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WFC stock - Don’t Buy Into the Wells Fargo Stock Buyback Hype

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Wells Fargo (NYSE:WFC): Founded in 1852; refounded in 2018. The company’s latest advertising slogan is an attempt to shake of years of scandal related to overcharging and misleading customers. The results of those scandals can be seen in WFC stock, as its gains have lagged it’s banking stock peers.

But, there is a fresh wave of scandals hitting Wells Fargo this year. A case filed in El Paso, Texas, alleges that Wells Fargo violated the U.S. Truth in Lending Act. The act decrees that lenders are supposed to disclose, in detail, their financing charges.

Elsewhere, the SEC just fined the Wells Fargo’s investor advisement arm $5.1 million to settle charges that its brokers misled investors into selling off investments before they matured, causing them to pay high fees to the bank.

Wells Fargo may have to adjust it’s latest advertising slogan. Re-refounded in the second half of 2018? 2019?

For investors, no refounding is needed. Just a few kind words from the Federal Reserve. Last week the Fed said that Wells Fargo passed its annual stress tests and gave the company the go ahead to return billions to WFC stock shareholders.

Wells Fargo wasted no time in announcing a dividend increase to 43-cents-per-share, from 39 cents, and a whopping $24.5 billion share-buyback program over the next four quarters. Investors cheered the move, and sent WFC stock soaring higher on the news.


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But don’t fall for the stock-buyback smoke screen — it’s a growing ploy on Wall Street as U.S. monetary policy tightens. What’s more, Wells Fargo still has issues, as this year’s scandals have shown. Even the Fed took note of the issues when it grudgingly approved Wells Fargo’s capital plan.

Given the troubles Wells Fargo is facing, its safe to say the long-term outlook is decidedly bearish. But there is a short-term event that could kick off a reversal in WFC stock sooner than expected.

On July 13, Wells Fargo will report second-quarter earnings. Wall Street is expecting a profit of $1.12-per-share on revenue of $21.66 billion. Analysts are rather gung-ho about Wells Fargo’s report, with EarningsWhispers.com putting the whisper number 4 cents higher than the consensus at $1.16-per-share.

But that’s where their optimism ends. According to  Thomson/First Call data, WFC stock has earned just 12 “buy” ratings, compared to 15 “holds” and four “sells.” The 12-month price target rests at $61.28. In short, there is plenty of room for both downgrades and price-target cuts should earnings and revenue come up short.

Options traders, meanwhile, are showing no fear. The July put/call open interest ratio rests at a bullish reading of 0.63, which is easily in the bottom quarter of all readings taken on WFC stock in the past year. Look for this reading to trend higher heading into earnings, as WFC bulls pile on the bandwagon.

Overall, July implieds are pricing in a potential post-earnings move of about 4.2% for WFC stock. This places the upper bound near $59, while the lower bound lies near $54.

Two Trades for WFC Stock

Bear Put Spread: I don’t think WFC stock is out of the woods in terms of scandals yet, despite the claims of “refounded in 2018.” The legal fees and SEC fines are sure to impact the bottom line, even if they only show up as one-time write-offs … for now. Those looking to bet against WFC stock might want to consider a July $54/$55 bear put spread.

At last check, this spread was offered at 14 cents, or $14-per-pair-of-contracts. Breakeven lies at $54.86, while a maximum profit of 86 cents, or $86-per-pair of contracts, is possible if WFC closes at or below $54 when July options expire.

Bull Call Spread: As John Maynard Keynes once said, the market can remain irrational longer than you can remain solvent. Irrationality could certainly continue to drive WFC stock higher, even after earnings. This is especially true if traders continue to overlook WFC’s long-term issues in favor of short-term gains.

Given WFC stock’s momentum coming out of the Fed’s stress tests, any positive news in this month’s earnings report could spark more buying in WFC. Those looking to bet on a continued run higher might want to consider a July $57.50/$58 bull call spread.

At last check, this spread was offered at 3 cents, or $3-per-pair-of-contracts. Breakeven lies at $57.53, while a maximum profit of $1.70, or $170-per-pair of contracts, is possible if WFC closes at or above $58 when July options expire.

As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.


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Article printed from InvestorPlace Media, https://investorplace.com/2018/07/dont-buy-into-the-wells-fargo-stock-buyback-hype/.

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