Why Wells Fargo Is Poised to Surge in the Longer Term

In line with my previous prediction, the recent robust economic recovery boosted Wells Fargo’s (NYSE:WFC) third-quarter results nicely. Meanwhile, the valuation of WFC stock remains extremely attractive and worries about the bank’s previous scandals are tremendously overdone.

Wells Fargo (WFC) bank sign in yellow and red with wagon logo. The sign is flanked by tall grass
Source: Ken Wolter / Shutterstock.com

Wells Fargo’s earnings per share came in at 42 cents, up from a loss of 66 cents in Q2. What’s more, the bank’s top-line rose to $18.9 billion from $17.8 billion last quarter, while the company’s return on equity jumped to 4.22% from -6.63%.

After I praised the strength of the bank’s loan in my June piece, its total loan chargeoffs also plunged to $683 million in Q3 down from $1.11 billion in Q2. Finally, Wells’ total loan balance at the end of Q3 was down only about 3.5% versus Q3 of 2019 (Page 4).

In the report, CEO Charlie Scharf explained, “Strong mortgage banking fees, higher equity markets, and declining sequential charge-offs positively impacted our results.” Needless to say, investors should consider this bank again.

Attractive Valuation of WFC Stock

InvestorPlace contributor Mark Hake recently noted that shares in WFC are trading well below the company’s tangible book value per share (TBVPS) of $32.23 as of Sept. 30. Since Nov. 16, Wells’ stock has been changing hands around the $25 mark.

Noting that “bank stocks often sell for 50% to 100% more than their tangible book value,” Hake also stated that Wells’ TBVPS could climb 12% in two years. That, in turn, leads him to believe WFC stock could exceed $43 by the end of 2022.

Based on more commonly used valuation metrics, the shares also look cheap. Specifically, they are trading at a forward price-earnings of just 12, a trailing price-sales ratio of just 1.34, and a price-book ratio of only 0.62. For comparison, JPMorgan (NYSE:JPM) stock has a forward price-earnings ratio of nearly 15, a trailing price-sales ratio of 2.98, and a price-book ratio of 1.44.

Worries About the Scandal Are Overdone

So, why is WFC stock undervalued? A major reason behind the lowballing is fear that the bank’s 2016 cross-selling scandal could hurt its financial results going forward.

Illustrating Wall Street’s reservations about the bank, a Seeking Alpha columnist recently wrote:

“We know Wells Fargo is a mess. […] Wells Fargo has signaled repeatedly that the worst of the phony account scandal is in the past, but elevated operating losses have persisted. The bank faces a tough road ahead.”

However, it’s important to remember that even the Barrack Obama administration — which was pretty far to the left on the political spectrum — did not meaningfully hurt the large banks in the wake of the financial crisis, even though it could easily have justified doing so.

Now with a Joe Biden administration, a Republican Senate and a closely divided House, Wells Fargo could be in much better position than it is now. In fact, Biden proved to be a close ally of the credit-card industry during his Senate career. In my opinion, Biden will actually be easier on the banks than Donald Trump’s administration, which sometimes cracked down on companies it viewed as bad for America.

Meanwhile, the Republican Senate — along with House Republicans and conservative House Democrats — should prevent Biden from having to make too many compromises with the radicals in his party. As such, I don’t think Wells has much to fear from Washington in the next few years.

Further, Wells’ average loan total of $932 million in Q3 — along with its $1.4 trillion of deposits and Q3 revenue of $18.9 billion — show that plenty of Americans are still willing to do business with the bank.

Vaccines Should Help Wells Fargo

On top of the bank’s positive earnings report, vaccines for Covid-19 look poised to be distributed very soon. These drugs are likely to ignite the economy, releasing tremendous pent-up demand from consumers by the end of the first half of 2021.

Those factors should boost Wells’ loan growth. That could also cause the Federal Reserve to raise interest rates sooner than expected, raising the bank’s net interest income.

Just like for many companies, the end of the pandemic could be a shot in the arm for WFC stock.

Bottom Line

Wells Fargo’s Q3 results improved dramatically from Q2. Moreover, the valuation of WFC stock is very attractive. In my opinion, the scandal in the bank’s past will not meaningfully hurt it going forward. Finally, investors in Wells can expect to see a boost with the launch of Covid-19 vaccines.

Given all of these points, I continue to recommend that longer-term investors buy shares.

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

Larry Ramer has conducted research and written articles on U.S. stocks for 13 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been GE, solar stocks, and Snap. You can reach him on StockTwits at @larryramer.

 


Article printed from InvestorPlace Media, https://investorplace.com/2020/11/why-wfc-stock-is-poised-to-surge-longer-term/.

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