The banks have not had it easy lately. While the coronavirus from China has stirred up plenty of volatility in the stock market, the financial sector has been hit especially hard. Wells Fargo (NYSE:WFC) has been drilled, falling about 42% from its 52-week high.
However, unlike most of its peers, WFC stock hit that high back in November. Most other major investment banks hit their highs in January after reporting decent or solid fourth-quarter earnings.
Unfortunately for Wells Fargo, investors did not react favorably to its Q4 results, as the bank’s earnings and revenue guidance came in below analysts’ average expectations. For a while now — pretty much ever since it experienced multiple scandals — Wells Fargo has been an unloved name in the sector. As a result, the stock continues to underperform its peers. Even during this latest bout of volatility, the bank’s shares are down more than those of its peers, including JPMorgan (NYSE:JPM), Goldman Sachs (NYSE:GS), Morgan Stanley (NYSE:MS), Citigroup (NYSE:C) and Bank of America (NYSE:BAC)
Let’s dig deeper on Wells Fargo.
Trading WFC Stock
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Before we examine the bank’s fundamentals, let’s look at a five-year weekly chart of WFC stock.
Towards the end of 2020, you can see how Wells Fargo traded just under the $54 mark for weeks, but was simply unable to rise above that level. Also disturbing was how quickly the shares broke back down below the 200-week moving average in the first few weeks of 2020.
Consolidating just below that mark, WFC stock was indicating that it simply was not as healthy as its peers, many of whom had reached or neared new 52-week highs following strong earnings reports.
That’s all investors really needed to see, quite frankly. The bank’s fundamentals were weak after its disappointing quarterly result and its technicals were poor.
But now the shares are under immense selling pressure. As a result, WFC stock has fallen below its multi-year range support near $40. Buyers have shown a propensity for stepping near $40, but that’s not likely to occur in the current environment.
Valuing Wells Fargo
Wells Fargo looks like a cheap stock, trading at just under ten times analysts’ average 2020 earnings estimate. There are a few problems with this theory, though.
First, Wells’ earnings are expected to be unchanged in 2020 on a 6.5% decline in revenue. Second, of the banks listed above , only JPMorgan is more expensive than WFC, based on estimated 2020 P/E ratios.
That’s not all, though. Since the start of the year, the average earnings estimate for 2020 has cratered 18.5% for Wells Fargo. Among the other large banks named above, Wells is the only one whose earnings estimates have fallen in 2020. The average earnings estimates for three of the banks –Morgan Stanley, JPMorgan and Citigroup — have climbed by double-digit-percentage levels.
On a price-to-book basis, Wells Fargo is the second-most expensive stock, at 0.98. Only JPM — considered by many to be the highest-quality bank — has a higher price-book ratio. Citigroup, Goldman, BofA and Morgan Stanley all have lower P/B ratios.
About the only place WFC stock has its peers beat is its dividend yield, which is now 5.2%. That’s almost two percentage points better than the next highest yield, Morgan Stanley’s 3.3%.
That said, WFC stock is more expensive than its peers, is growing more slowly, and has an unattractive technical setup. At this stage, Wells Fargo may be a buy for income-focused investors looking for a low-risk setup from a technical perspective. But long-term investors looking for a blend of growth, low valuation and yield can do better elsewhere, starting with some of WFC’s peers.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell is long C.
