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Investors Can Still Find Profit in Bruised Wells Fargo Stock

Wells Fargo (NYSE:WFC) has made tremendous progress in the last 20 years. But now WFC stock is 25% off its all-time highs, after collapsing in 2017 in the wake of various scandals. But management seems to have finally gotten the message. The company is now playing a game of catch-up to repair years of damage, and therein lies an opportunity to book some profits.

After Impressive Earnings WFC Stock Is Clearly Undervalued
Source: Martina Badini / Shutterstock.com

I last wrote about this opportunity in April, but the thesis today is similar. There is upside potential in WFC stock, but it first must hold support to give bulls a solid platform. The stock fell 2.5% yesterday along with the financials sector, after prices for U.S. Treasury bonds spiked. The problem at today’s levels is that the stock is near a bearish technical trigger which could have serious price implications. If bulls can’t defend yesterday’s lows, that trigger could bring new ones.

Last week also brought a setback, from the infamous Berkshire Hathaway (NYSE:BRK.A, NYSE:BRK.B). The company’s U.S. Securities and Exchange Commission 13F filing showed that it sold off a substantial stake in WFC. Berkshire’s Warren Buffett has held the stock for a long time, and this is news is certainly not going to help Wells Fargo. And investors are already frustrated, because unlike other financials, Wells Fargo has not fully recovered. JPMorgan Chase (NYSE:JPM) has even managed to set a new record. Clearly, there is divergence between WFC and its bank peers.

The underperformance of WFC stock comes with an asterisk. If the broader markets were also suffering, the damage to the company would have been much worse. So, in that perspective, it’s doing as well as one could hope. But there might be another good reason for it holding up, and the long-term charts tell this story. It has a line in the sand around $44 that dates back to September 2008. It has used this line as support several times since the 2007-08 financial crisis, and has tested $44 nearly 10 times.

Both Opportunity and Danger Exist in WFC Stock

Wells Fargo Stock Chart
Source: Charts by TradingView

The current share price near $47 lies just above the proven base at $44. This means that bulls can be brave when buying dips. But, if for whatever reason the base at $44 breaks, that level becomes a trap door for more downside action. If the bulls lose $43, that drop could trigger a per-share correction of $5-$7. Although this is not my forecast, it is a scenario that actually exists. More often than not such clear baselines hold and withstand the tests. Unless management has another skeleton in the closet, the stock should survive the ongoing test.

The upside opportunity comes from the bulls taking advantage of the support below to finally gather enough momentum to breakout from the lower-high trend. When that happens, momentum traders get involved because they like to buy high and sell higher. So, if the stock moves above $52 per share, those traders could trigger an $8 rally. There will be resistance at $50, $52.50, $54.50 and $59. Every ledge on the way down will become resistance on the way up.

The Bottom Line on Wells Fargo

The impact from the coronavirus remains unknown, so the stock market is at risk for the next six months. The global GDP will suffer. Unless governments succeed in making up the losses with more quantitative easing and fiscal spending, stocks are going to be at a disadvantage. Nevertheless, those who own Wells Fargo stock can wait this battle for support out because it has already shed a lot of its fat. Even though it could get cheaper, at a trailing price-to-earnings ratio near 12, there’s not a lot of froth to trim.

It is also okay to start new positions here, as long as you do so with caution. Taking full-sized positions despite that looming uncertainty is reckless. It is always a better idea to leave room for error. If you don’t, it is impossible to manage risk when the price goes against the trade.

Wall Street is fickle and a lot of the experts like to copy what Buffett’s company does. So, the stock is also at risk from surprise downgrades from copy-cat investment houses. I tend to not listen to the experts because their suggestions are often late and confusing. Investors should do their own homework and use common sense. And in this case it’s pretty clear that the stock is fundamentally sound. The technicals in the chart echo that message as long as support holds.

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. Join his live chat room for free here.


Article printed from InvestorPlace Media, https://investorplace.com/2020/02/investors-can-still-find-profit-in-bruised-wells-fargo-stock/.

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