There was a time not too long ago when Wells Fargo (NYSE:WFC) was envied for its impressive growth results. But this ended in January 2018. It turned out that their tactics were too aggressive and even criminal. WFC managers were caught forcing customers into accounts they didn’t need or authorize for the sake of beating performance metrics.
Since then, the legislators have been on Well Fargo management to eliminate the practice and atone for their sins. The bank was able to stop the questionable practices, but the atonement is the tough part. WFC stock is now 27% below its early-2018 highs.
Politicians, including Elizabeth Warren, have been relentless in their attacks on WFC and calling for the resignation of its CEO. Well, yesterday they got their wish. WFC announced that CEO Tim Sloan will step down and that the company’s general counsel, C. Allen Parker, would take his place until they find a permanent, outside replacement.
And therein lies the opportunity. WFC stock is cheap and has technical support below it. It also has technical reasons for a nice rally with more upside potential than downside risk.
Since this time it looks like the replacement CEO will be an outsider, political pressure is likely to ease as well. There are a lot of institutions and investors who do not invest in companies when they are at odds with legislators. This would be one less thing for traders to worry about.
Historically, Wells Fargo stock carried a premium to other bank stocks, but that was due to its great results. Since the public found out those results were inflated, that premium is gone.
So now WFC is as cheap as the other bank stocks selling at an 11x trailing P/E ratio and 1.3x price to book value. So just like most other U.S. money centers, investors are vaulting WFC almost at its liquidation value. From that perspective, WFC’s issues have just left it leaner and less mean. The crisis took all of the relative froth out of the WFC stock.
Furthermore, banks stocks in general have been on sale for over a year. They have not been able to sustain any rallies. The Financial Select Sector SPDR Fund (NYSEARCA:XLF) is down 6% in the last 12 months while the S&P 500 is up 9%. Clearly they have some catch up to do once some of the macro uncertainties abate.
All of these factors limit WFC stock’s downside risk — making it a good time to buy. I consider this to be a long-term investment in a premier bank that will eventually work its way back to the top.
Trading WFC Stock
WFC is rallied initially on last night’s news. But that rally has already faded — it was likely just a relief pop. Those tend to be temporary.
In addition to its specific problems, WFC stock has been suffering from the fierce rally bond prices that affected all bank stocks. This was caused by the US Federal Reserve uber dovish statement. They caused a crash in yields and that typically drags banks stocks down with it.
However, if the bulls can manage to turn this around and bid WFC up to $52.50 per share in the coming days, they would trigger a bullish pattern. This would invite momentum buyers to target $57 per share. There will be resistances along the way at $51.50, $55 and $55.80 per share.
In light of the recent leadership change, I bet that there will be many who want to also own WFC for the long term. But don’t just take my word for it, the experts on Wall Street agree that there is much more upside.
WFC is trading well below their average price target. Moreover, half of the analysts who cover the stock rate it as a HOLD. Maybe the new CEO will spur some of them to upgrade the stock to BUY.
Given the current macroeconomic and geopolitical uncertainties that loom, it would be prudent to take half a position to start. This would leave me room to add more on pullback.
Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him as @racernic on Twitter and Stocktwits.