Does Wells Fargo Belong in Your Portfolio?

With shares of Wells Fargo (NYSE:WFC) trading around $51, is WFC an OUTPERFORM, WAIT AND SEE, or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

T = Trends for a Stock’s Movement

Wells Fargo is a diversified financial services company. It has three operating segments: Community Banking; Wholesale Banking; and Wealth, Brokerage, and Retirement. The company provides retail, commercial, and corporate banking services through banking stores and offices, the Internet, and other distribution channels to individuals, businesses, and institutions around the world. Wells Fargo also provides wholesale banking, mortgage banking, consumer finance, equipment leasing, agricultural finance, commercial finance, securities brokerage and investment banking, insurance agency and brokerage services, computer and data processing services, trust services, investment advisory services, mortgage-backed securities servicing, and venture capital investment.

Wells Fargo is laying off nearly 500 workers from its mortgage servicing team in the Birmingham area, officials announced Thursday. Bank officials said in a statement that 468 employees in Homewood are being let go because fewer of the bank’s home loan customers need payment assistance or are facing foreclosure. Employees are being given a 60-day notice and may be eligible for severance pay depending on how long they’ve been with the company, officials said. The bank is also providing job counseling and will work to find other opportunities within the company for the laid-off workers.

“Our decision was made with great concern for the team members who are affected. They have been an essential part of our success in home preservation. The team members at Wildwood alone helped save thousands of homes. We are very grateful for their service,” bank officials said in a statement. The Birmingham-area layoffs are part of 481 positions that are being eliminated nationwide. Birmingham is the headquarters of the bank’s mid-South region. The facility the mortgage servicing employees are being laid off from will remain open and 724 employees are expected to continue working there, officials said.

T = Technicals on the Stock Chart are Strong

Wells Fargo stock has seen positive progress over the last several months. The stock is currently trading near all time highs and looks poised to continue. Analyzing the price trend and its strength can be done using key simple moving averages. What are the key moving averages? The 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages. As seen in the daily price chart below, Wells Fargo is trading between its rising key averages which signal neutral price action in the near-term.

WFC

Source: Thinkorswim

Taking a look at the implied volatility (red) and implied volatility skew levels of Wells Fargo options may help determine if investors are bullish, neutral, or bearish.

Implied Volatility (IV)

30-Day IV Percentile

90-Day IV Percentile

Wells Fargo options

18.86%

56%

54%

What does this mean? This means that investors or traders are buying a significant amount of call and put options contracts, as compared to the last 30 and 90 trading days.

Put IV Skew

Call IV Skew

August Options

Average

Average

September Options

Average

Average

As of today, there is an average demand from call and put buyers or sellers, all neutral over the next two months. To summarize, investors are buying a significant amount of call and put option contracts and are leaning neutral over the next two months.

On the next page, let’s take a look at the earnings and revenue growth rates and the conclusion.

E = Earnings Are Increasing Quarter-Over-Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. Also, the last four quarterly earnings announcement reactions help gauge investor sentiment on Wells Fargo’s stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for Wells Fargo look like and more importantly, how did the markets like these numbers?

2014 Q2

2014 Q1

2013 Q4

2013 Q3

Earnings Growth (Y-O-Y)

3.06%

14.13%

10.22%

12.5%

Revenue Growth (Y-O-Y)

3.64%

13.93%

9.89%

-3.3%

Earnings Reaction

-0.61%

0.77%

0.06%

-0.02%

Wells Fargo has seen increasing earnings and revenue figures over the last four quarters. From these numbers, the markets have been pleased with Wells Fargo’s recent earnings announcements.

P = Excellent Relative Performance Versus Peers and Sector

How has Wells Fargo stock done relative to its peers, Bank of America (NYSE:BAC), Citigroup (NYSE:C), JPMorgan Chase (NYSE:JPM), and sector?

Wells Fargo

Bank of America

Citigroup

JPMorgan Chase

Sector

Year-to-Date Return

11.63%

-2.37%

-5.62%

-1.06%

1.64%

Wells Fargo has been a relative performance leader, year-to-date.

Conclusion

Wells Fargo is a leading provider of financial services to consumers and companies around the world. The company announced on Thursday that it will be laying off nearly 500 workers from its mortgage servicing team in the Birmingham area. The stock has been moving higher in recent quarters and is currently trading near all time highs. Over the last four quarters, earnings and revenues have been increasing, which has left investors pleased. Relative to its peers and sector, Wells Fargo has been a relative year-to-date performance leader. Look for Wells Fargo to continue to OUTPERFORM.

Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

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