Should you buy into the recent rally in Wells Fargo (NYSE:WFC) stock? The money center bank is still trying to shake off its troubled past and bad reputation. Added in the equation is the bank’s novel coronavirus headwinds, which fueled its massive decline back in March. But, while this remains the big bank with many fleas, there’s good reason why shares are a strong opportunity at today’s prices.
Firstly, the red flags and risks associated with this stock remain more than priced-in. That’s not to say it’s has nowhere to go but up. What it does mean is that its prior controversy likely won’t result in another tremendous fall from today’s price levels (between $25 and $30 per share).
Secondly, a year after Charlie Scharf took the helm, the company’s turnaround plan is in motion. The plan, which includes aggressive cost slashing, could help put more points into the stock, if and when it starts to pay off.
Thirdly, after its dividend slash earlier this year, shares could see big gains once the payout goes back to historical levels. Granted, even now this looks more like an “if” than “when” situation. As this commentator recently noted, the company must wait for the Federal Reserve to end its current round of stress testing until it can bring its dividend back to prior levels.
Yet, while shares could fall again in the near-term if the recent Covid-19 case surge gets worse, long-term, risk/return remains in your favor at today’s prices.
Can WFC Stock Rebound in 2021?
Since March’s coronavirus crash, stocks across many sectors bounced back to prior price levels. But not big bank stocks like Wells Fargo. Sure, shares shot up from their 52-week lows. But, at today’s prices (around $26 per share), they remain at about half of where they were back in January.
So, where does the money center bank stand with regards to a full rebound? While challenges continue, bank stocks in general have room to run, as Barron’s put it Nov 10. Covid-19 vaccine developments could mean better times ahead for this hard-hit industry. Sure, today’s extremely low interest rates mean net interest margins remain challenged. But, if rates continue to move back up, expect the industry’s bottom line to move back up as well.
Granted, this bank is more behind the eight ball than its stronger peers. Money center rivals Bank of America (NYSE:BAC) and JPMorganChase (NYSE:JCM) are also still recovering from the pandemic. But, neither one had pre-outbreak headwinds on par with that of Wells Fargo.
Yet, while its still paying the price for its past bad actions, don’t view this as a factor that will have additional impact on shares.
Don’t Get Scared Off By Recent Headlines
The non-pandemic headwinds associated with WFC stock may have happened years ago. But, a recent action by the Securities and Exchange Commission (SEC) brought them back into the headlines.
As InvestorPlace’s Chris Lau discussed Nov 19, the regulatory agency charged both Wells Fargo’s former CEO, along with the former head of its community bank division, for misleading investors during the bank’s mid-2010s “fake accounts” scandal.
Does this past scandal continue to be a risk for WFC stock going forward? Lau says shares could continue to underperform, until the “asset cap” sanction imposed by the Federal Reserve gets removed.
Yes, this limits how much profits and bounce back. But, I don’t see the continued cap causing further declines. With its credit loss provisions lower than expected, the bank generated around $2 billion in net income last quarter.
Granted, last quarter’s results were still sharply down from the prior year’s quarter. But, as conditions improve for the big banks, expect this one’s earnings to continue climbing back as well.
It’s No Slam Dunk, But Risk/Return Remains in Your Favor
Will an earnings rebound mean a “return to normal” for its prior dividend payout? It’s complicated. As mentioned above, Wells Fargo can’t raise its dividend back to prior levels until the Fed ends its current restrictions.
In theory, the Fed’s dividend cap could end as soon as December. But, surging Covid-19 cases could mean tough times through the winter. If this winds up happening, you can count on these restrictions staying in place well into 2021.
And, that’s not the only near-term concern. A second round of widespread lockdowns is a major risk as well. As this would further impact the overall economy, bank stocks could take another hit, and fall back toward prior price levels.
Yet, while shares may head lower in the near-term, risk/return remains in your favor at today’s prices. The potential long-term gains outweigh the risk WFC stock falls significantly lower from here.
On the date of publication, Thomas Niel did not (either directly or indirectly) hold any positions in the securities mentioned in this article.
Thomas Niel, a contributor to InvestorPlace, has written single stock analysis since 2016.
