Does Wells Fargo Belong in Your Portfolio?

With shares of Wells Fargo (NYSE:WFC) trading around $50, 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 set to end the legal tussle it has been encountering since 2011 for a settlement of around a minimum of $67 million in connection with the “robo-signing” fiasco. It was alleged that company officials conducted improper verification of documents in the home-foreclosure process. In a judicial foreclosure state, the foreclosure process requires that the lending institution must authorize the fact that the homeowner has defaulted on a mortgage that the lender owns. It needs to be authorized through submission of verified documents and written statement duly signed under affidavit by a bank official. The objective is to restrict the possession of houses by the bank in the event where the bank is unable to prove the ownership of the particular mortgage or where, in actuality, the homeowner has not defaulted to the extent stated in the foreclosure papers.

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 set 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 above its rising key averages, which signals neutral to bullish price action in the near-term.

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

14.16%

3%

0%

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

Put IV Skew

Call IV Skew

June Options

Flat

Average

July Options

Flat

Average

As of Wednesday, there is average demand from call buyers or sellers and low demand by put buyers or high demand by put sellers, all neutral to bullish over the next two months. To summarize, investors are buying a small amount of call and put option contracts and are leaning neutral to bullish 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 Q1

2013 Q4

2013 Q3

2013 Q2

Earnings Growth (Y-O-Y)

14.13%

10.22%

12.5%

19.51%

Revenue Growth (Y-O-Y)

13.93%

9.89%

-3.3%

0.42%

Earnings Reaction

0.77%

0.06%

-0.02%

1.76%

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), and JPMorgan Chase (NYSE:JPM) — and sector?

Wells Fargo

Bank of America

Citigroup

JPMorgan Chase

Sector

Year-to-Date Return

11.28%

-2.92%

-8.79%

-5.19%

-2.4%

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 is set to end the legal tussle it has been encountering since 2011 for a settlement of around a minimum of $67 million. 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 OUTPERFORM.

Using a solid investing framework such as this can help improve your stock-picking skills. Don’t waste another minute — click here and get our CHEAT SHEET stock picks now.

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