Why Investors Should Bank On Well Fargo

After a punishing year, the banking sector has suddenly gone into the bull phase because of the positive news from Pfizer’s (NYSE:PFE) vaccine. Yet many stocks are still well off their yearly highs. Just look at Wells Fargo (NYSE:WFC). Since January, WFC stock dropped from $53 to $24.

Dividends Are the Best Reason to Hold Wells Fargo Stock
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Unfortunately, this bearishness in WFC is nothing new. The company has been a laggard for the past five years or so. No doubt, the wide-ranging scandal – involving the creation of millions of false savings and checking accounts without client consent – was a major cause for this. This resulted in an erosion of trust but also sanctions from regulatory authorities. And, rivals like Bank of America (NYSE:BAC) and JPMorgan (NYSE:JPM) gained ground on the bank.

But there were other notable headwinds. Because of the slowing of the U.S. economy and the jump in unemployment, there was the need to bolster reserves for loan losses. Tighter margins also followed rock-bottom interest rates.

Oh, and the banking industry is under increasing threats from fast-growing fintech operators. Venture capitalists poured billions of dollars into startups like Chime. These companies saw strong growth in client accounts because of the ease-of-use of the apps and the low-cost features.

So in light of this, is it any wonder that WFC stock suffered? Of course not. Just look at the latest earnings report. During the quarter, the company reported a 56% drop in earnings to $2.04 billion or 42 cents a share. As for revenue, it fell by 14% to $18.86 billion.

A Bull Case Here – Maybe?

The list of problems is certainly ominous. But then again, there still may be an opportunity for investors with WFC stock.

Consider the loan-loss reserves. For the year, the company set aside a hefty $14.15 billion. Yet this is probably a conservative amount since management does not want to keep on raising the amount.  And if the new novel coronavirus vaccine is rolled out quickly, this will be another big positive.  This means that – in the coming quarters – there could be a notable improvements for the bottom line.

Next, the WFC is focused on a major cost-cutting campaign. CEO Charles Scharf said he wants to reduce the cost structure by a $10 billion. In other words, this would be yet another big boost for profits.

Then there will be the unloading of various business units. For example, the company plans to exit the private student-loan business. There is also buzz that WFC will sell its asset management and corporate trust units.

The timing for this is auspicious. Note that there was consolidation in the category, which drove valuations higher. The most recent example of this is Morgan Stanley’s (NYSE:MS) acquisition of Eaton Vance (NYSE:EV).

Bottom Line on WFC Stock

The valuation on WFC stock is downright cheap. Keep in mind that it trades at only about 0.75 times net tangible value. Thus, investors have really given up on this company.

But this does look like an overreaction. The company’s balance sheet is strong and it follows a conservative approach to managing assets. The restructuring will also generate significant amounts of cash that can be used to bolster higher-margin businesses and provide for share buybacks.

Meanwhile, WFC is benefits from its investments in digital technologies. Note that the company has 32 million online and mobile active customers – and the base is growing.

Now a turnaround could still take time. But there are definitely reasons to be bullish on it.

On the date of publication, Tom Taulli did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.

Tom Taulli (@ttaulli) is an advisor/board member for startups and author of various books and online courses about technology, including Artificial Intelligence BasicsThe Robotic Process Automation Handbook and Learn Python Super Fast. He is also the founder of WebIPO, which was one of the first platforms for public offerings during the 1990s.

Article printed from InvestorPlace Media, https://investorplace.com/2020/11/why-investors-should-bank-on-well-fargo-wfc-stock/.

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