The relatively strong macro outlook for Wells Fargo (NYSE:WFC), along with the low valuation of Wells Fargo stock and the high quality of its loans, make me upbeat on the shares. Wells Fargo’s very high dividend yield certainly doesn’t hurt, either.
Boosted by the government’s “shock and awe” intervention and the retention of most high-income jobs, the economy looks poised to avoid the type of harsh, tremendously ruinous recession we saw in 2008.
I’ve discussed the retention of most high-income jobs in many previous columns; at this point, I’ll just note that most high-paying sectors haven’t fired a meaningful number of employees.
Further, the Fed’s huge intervention has kept most sizable companies from going under, with most bankruptcies confined to the energy and retail sectors. But the majority of the medium and large companies even in those sectors should survive, as the combination of government aid and the reopenings should enable most of them to stay in business.
Meanwhile, the Payroll Protection Program has kept many small businesses afloat, enabling them to rehire workers as fears of the virus plummet and economies reopen. We saw the positive impact of all of these factors in the much-better-than expected May jobs report, which shows that the economy in general and the labor market, in particular, are on the right track.
Finally, the stimulus provided by Congress, in the form of direct payments and extra unemployment benefits, has given consumers a great deal of money to spend. These factors are going to enable Wells Fargo to report better-than-expected financial results going forward.
Trends and Wells Fargo Stock
Some of the trends I discussed above showed up in recent economic data.
Late last month, it was reported that personal income had jumped 10.5% year-over-year in April. And earlier in June, the government reported that the number of people receiving unemployment benefits had fallen to 21.5 million from 25 million.
As more states reopen their economies and fear of the virus continues to recede, more employers will rehire their workers and more consumers will spend the money they’ve earned. By early fall, the economy looks set to be rebounding sharply, barring any other large, unforeseen shocks.
The likely economic rebound will help Wells Fargo in multiple ways. Specifically, its loan default rates will not, as many may expect, skyrocket, and it will be able to make many highly profitable new loans.
Further, by the end of the year, interest rates could start to increase, boosting Wells’ interest income.
Other Points to Consider
Speaking of Wells’ loans, their quality is generally quite high, according to a Seeking Alpha columnist. And the bank has “strong collateral support and low loan to value ratios,” meaning that it won’t lose a great deal of money even if its borrowers default.
Further, in my previous column on Bank of America (NYSE:BAC), I predicted that the bank’s trading revenue would be boosted by the volatility of the markets, while its interest income would rise because many large companies drew on their credit lines at the outset of the coronavirus crisis. Those trends will also boost Wells Fargo and Wells Fargo stock.
Also, like Bank of America, Wells’ results should be lifted by higher deposits, fueled by America’s recent huge savings increases. And Wells’ facilitation of the PPP program should also bring in meaningful extra revenue.
Finally, the bank’s high dividend yield of 7%, which is quite secure given its 121% liquidity coverage ratio, is also very attractive.
The Bottom Line on Wells Fargo Stock
The stock’s price/book ratio is 0.7, down almost 50% from 1.3 at the end of last year. Yet, as we’ve seen, the macro outlook is not too bad and the economy should avoid a deep recession.
Moreover, those who buy the shares will get paid 7% per year to wait for even better economic times to kick in. Given all these points, I recommend buying Wells Fargo stock.
Larry Ramer has conducted research and written articles on U.S. stocks for 13 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been Lyft, solar stocks and Snap. You can reach him on StockTwits at @larryramer. As of this writing, he did not own any shares of the aforementioned companies.