The coronavirus crisis took a major toll on the American banking sector this year. Financial giant Wells Fargo (NYSE:WFC) struggled as businesses didn’t take out as many loans and/or couldn’t readily repay their loans. And this issue was reflected by the decline of Wells Fargo stock.
So, while some businesses are enjoying V-shaped recoveries, Wells Fargo is still trying to regain its footing. Less stalwart shareholders have probably either bailed on the stock already or might be considering dumping their shares of Wells Fargo. Prospective investors, meanwhile, may be reluctant to buy the stock amid the banking sector’s financial troubles.
Buying the shares of downtrodden but historically solid companies isn’t easy. However, it’s a foundational habit of value investors. Wells Fargo is down but not necessarily out. Clear-headed traders can view its current situation as an opportunity rather than as a source of distress.
A Closer Look at Wells Fargo Stock
Interestingly, Wells Fargo’s shares were already facing major resistance even prior to the onset of the coronavirus. Since 2014, the stock has pushed up against the $60 level multiple times. Each and every time, it has failed to rise above that level.
The most recent decline of its share price was particularly sharp, though. In terms of depth and speed, it was fairly reminiscent of its tumble during the 2008-2009 financial crisis.
But don’t forget what happened after the market bottomed out in 2009; Wells Fargo stock began a multi-year stock-price ascent. Wells Fargo’s investors could be facing a similar setup today. Of course, we’ll only know in hindsight, but at least the stock’s risk-reward ratio may be favorable at this point.
The Latest Worry
Stocks generally drop for a reason. The reason is sometimes obvious and sometimes more difficult to determine. And investors’ responsibility is to figure out whether the source of worry that caused the stock to decline is a temporary issue or a permanent problem.
If it’s not a permanent problem, the investing community’s fears will likely dissipate at some point. Then, the stock price will often (though not always) rise as the market comes to its senses. Value investors are thrilled when that happens.
Evidently, the most recent event which has put downward pressure on Wells Fargo stock was an announcement by CFO John Shrewsberry. He stated that the bank plans to put more of its profits into loan-loss reserves during the second quarter.
Due to the negative fiscal impact of the coronavirus, big banks have had to shore up their defensive reserves as more borrowers have missed loan payments or have simply defaulted altogether.
Providing for the Future
Wells Fargo isn’t alone, as all mega-banks are in the same boat now. It’s not the first time that large financial institutions have had to brace for impact, and it certainly won’t be the last time, either.
As investors worry about the bank’s outlook, skittish stockholders can get shaken out of their positions quickly. That’s apparently what happened on June 10, as Wells Fargo stock tanked as much as 8.3% during the trading day.
Investors should realize that Wells Fargo is big enough to withstand this type of crisis and that it’s firming up its reserves so that it can do so.
Granted, the company will have to put a whole lot of money aside for this purpose. In Q1, Wells Fargo increased its loan-loss provisions to $3.8 billion. As mentioned, it will further bolster its reserves in Q2.
That’s already been priced into the shares, so it probably would take another shock to send the Wells Fargo stock price down another 8% or more. Unless that happens, investors should calm down and walk the share price back up in a calm, orderly fashion like they’ve done before.
The Bottom Line on Wells Fargo Stock
In short, just relax and let the worry wash over you like a warm summer breeze. This, too, shall pass, and the recovery of Well Fargo stock does not have to be V-shaped as long as it happens at some point.
As of this writing, David Moadel did not hold a position in any of the aforementioned securities.