The door has pleasantly swung towards the ‘open for business’ direction in many ‘stay away’ stocks in recent days. But when it comes to Wells Fargo (NYSE:WFC), is Wall Street’s enthusiasm worth banking on as we head into the holidays and towards 2021?
Let’s see what’s happening off and on the price chart, then offer a risk-adjusted determination of Wells Fargo stock for today’s investors.
Delta (NYSE:DAL). Carnival (NYSE:CCL). Hilton (NYSE:HLT). Las Vegas Sands (NYSE:LVS). They’re diverse consumer-driven businesses. Each have also been among Covid-19’s ‘stay away’ stocks in both relative and absolute terms in 2020. But to steal and misuse a phrase, “the world has changed” for the better in most all of these type stocks in recent days. That list includes shares of Wells Fargo.
A third booster shot of good news, this time from AstraZeneca (NYSE:AZN), has lifted the majority of stay away stocks victimized in one way or another by the coronavirus. And as part of a fierce rotation into stay away stocks, including financial large-cap peers Bank of America (NYSE:BAC), JPMorgan Chase (NYSE:JPM) and others, Wells Fargo has jumped by roughly 19%. For good reason, right?
WFC Stock Not Your Typical ‘Stay-Away’ Stock
Wells Fargo’s performance might seem reasonable enough. Its business is concentrated in traditional commercial lending. Moreover, weakened loan demand from businesses in 2020 amid Covid-19 along with the costly overhead tied to more than 9,000 branch locations has been a liability.
But WFC isn’t your typical stay-away stock. And the banker’s problems may still be warning investors to remain more than arm’s length from shares.
Aside from still needing to navigate Covid-19 and vaccinations for the general population, there is today’s challenging interest rate environment. It’s one which is particularly difficult on Wells Fargo’s business model due to the puny spread between loans and deposits, i.e., net interest margins, which the company relies on. But with rates at historic lows, shouldn’t better days be ahead for WFC? Quite possibly, but Wells Fargo has other issues too.
As most investors and more than a few Wells Fargo customers are aware, the stock has been rocked the past couple years following incidents of improper and non-fiduciary behavior which now also includes this year’s Paycheck Protection Program (PPP).
To be fair, Wells Fargo has been cleaning house and Wall Street has been known to be a forgiving place. But even famed value investor Warren Buffett’s Berkshire Hathaway (NYSE:BRK.B) has aggressively reduced exposure to WFC as the chasm between the banker’s mission statement and its actual standard operating procedures widens. So, are you smarter than Warren?
Wells Fargo Monthly Price Chart
Source: Charts by TradingView
Warren doesn’t always get it right. Notably this year, his warning and Berkshire’s exit of its entire airliners stake is proving a bit rash. Importantly though, the investor has an amazing track record most of us can only dream of and is well-known for buying when others are fearful. Yet with Wells Fargo, his company has chopped down what had been its single largest holding to a fairly innocuous stake valued around $3 billion.
Technically, the monthly chart has this strategist leaning towards a pardon after a corrective cycle that’s lasted nearly three years. Backing the leniency, shares are confirming a monthly chart hangman reversal pattern. Wedged between the stock’s 62% and 76% retracement levels dating back to the 2008 – 2009 financial crisis, as well as sporting a bullish oversold stochastics setup, the price action has a lot going for it.
Bottom-line, I’m no fan of crooked behavior, but for investors that see things differently, Wells Fargo is shaping up nicely. Mindfully though, the price chart is now unequivocally about delivering upside follow-through. It’s not part of a value proposition welcoming investors to buy on future weakness in the stock.
As much, I’d recommend a January married put strategy and eventually a stock collar position to participate in a rally, but not be left holding the bag in the event of an unwanted technical outcome.
No stocks owned: On the date of publication, Chris Tyler did not hold, directly or indirectly, positions in any of the securities mentioned in this article.
Chris Tyler is a former floor-based, derivatives market maker on the American and Pacific exchanges. The information offered is based on his professional experience but strictly intended for educational purposes only. Any use of this information is 100% the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT and StockTwits