Wells Fargo (NYSE:WFC) joined the stock market rally in the last week and broke out above its multiple bottoms at $20.76 to $22. But WFC stock is not out of the woods nor is it indicating any buying momentum to rise steadily from here.
Before investing in Wells Fargo, the bank needs to overcome several past misdeeds that haunt it.
WFC Stock May Dip Again
On Nov. 13, the Securities and Exchange Commission charged the bank’s former CEO and Chairman, John Stumpf, and its former head of community bank, Carrie Tolstedt. Both are charged “for their roles in allegedly misleading investors about the success of the Community Bank, Wells Fargo’s core business.“ The use of a cross-sell metric in its business let the bank report the impressive sale of 6 products per household. Staff felt the pressure of selling and created fake accounts to meet the targets.
Stumpf will pay a modest $2.5 million fine to settle the charges. Tolstedt did not yet settle. From a legal standpoint, the staff committed fraud. Management faced charges for setting bonus incentives that encouraged such activities.
In the last few quarters, Wells Fargo shored up its oversight committee and continues to add measures to prevent the fraud from taking place again.
Investors need to decide if the stock is discounted enough to compensate for the negativity. From here, markets may turn their attention to the current CEO and chief financial officer. So far, the executives failed to improve the bank’s efficiency and remove the asset cap. Until that happens, the stock will underperform the other banks.
Related Investments
Investors may look at JPMorgan Chase (NYSE:JPM), Citigroup (NYSE:C), or Bank of America (NYSE:BAC) instead. None of these firms have reputational risks hurting their share price. All of these stocks broke out by rising 10% or more in the last week. Plus, they all pay a dividend whose yield is higher than that of Wells Fargo.
If investors want to benefit from the perpetually lower interest rates, then any of the above-mentioned bank stocks should perform well. Easing banking regulations will also give the sector a lift. And higher merger and acquisition activity would give banks more business, helping them report higher profits.
Opportunity
An impending second stimulus in the U.S. will encourage consumer spending. That would also benefit bank stocks. Conversely, a smaller stimulus and a cut in infrastructure spending would hurt the economy. Wells Fargo needs gross domestic product strength to generate better revenue momentum. Without it, the bank will struggle. Investors who dislike underperforming assets will end up selling shares instead.
In all but one of the quarters, Wells Fargo failed to beat analyst expectations:
| Surprise Type | Announce Date | Period End Date | Actual | Est. | Surprise (%) |
| EPS | EPS | ||||
| Positive | 10/14/2020 | 9/30/2020 | $0.56 | $0.47 | 19.10% |
| Negative | 7/14/2020 | 6/30/2020 | ($0.66) | ($0.16) | -312.50% |
| Negative | 4/14/2020 | 3/31/2020 | $0.01 | $0.65 | -98.50% |
| Negative | 1/14/2020 | 12/31/2019 | $0.93 | $1.12 | -17.00% |
| Negative | 10/15/2019 | 9/30/2019 | $0.92 | $1.15 | -20 |
Seasonality is also unfavorable. The stock tends to underperform from January to May every year. So, Wells Fargo may re-test 52-week lows first before recovering.
Fortunately, Wells Fargo earmarked around $1 billion in expense reductions to raise its efficiency. CEO Charlie Scharf said on the conference call that the gross reductions are in its plans for next year. It expects its net interest income trajectory heading higher, thanks to the low rate environment.
The consumer and small business banking franchise remains strong. So, as deposits increase, investments in digital capabilities will help the bank’s bottom line.
Valuation
On Wall Street, analysts have a mixed opinion on Wells Fargo. Five analysts rate the stock as a “buy” while six analysts rate it as a “hold.”
According to Tipranks, the average price target is almost $29.
Until the bank posts its next quarterly results in mid-January, the market will not have any data that would show that profits are growing. Traders may only guess that its mortgage and credit business is winning more customers.
Disclosure: On the date of publication, Chris Lau did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Chris Lau is a contributing author for InvestorPlace.com and numerous other financial sites. Chris has over 20 years of investing experience in the stock market and runs the Do-It-Yourself Value Investing Marketplace on Seeking Alpha. He shares his stock picks so readers get original insight that helps improve investment returns.
