Can Wells Fargo Continue Higher?

With shares of Wells Fargo (NYSE:WFC) trading around $37, 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 bank holding company that provides retail, commercial, and corporate banking services through banking stores and offices, the Internet and other distribution channels to individuals, businesses and institutions in 50 states, the District of Columbia and in other countries. It has three operating segments: Community Banking Wholesale Banking and Wealth, Brokerage and Retirement. Wells Fargo operates in a sector of the economy that provides the groundwork required for daily operations and growth. Through its segments, the company is able to reach a wide range of consumers and businesses that will continue to demand its services into the future.

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T = Technicals on the Stock Chart are Strong

Wells Fargo stock has seen a steady rise over the last ten or so years. In recent years, the stock looked to be consolidating but now may get going as it may be breaking out. 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 signal bullish 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

19.92%

26%

28%

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

May Options

Flat

Average

June Options

Flat

Average

As of today, there is an 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?

2013 Q1

2012 Q4

2012 Q3

2012 Q2

Earnings Growth (Y-O-Y)

22.67%

24.66%

22.22%

17.14%

Revenue Growth (Y-O-Y)

-2.57%

4.84%

5.74%

2.35%

Earnings Reaction

-0.79%

-0.84%

-2.64%

3.22%

Wells Fargo has generally seen increasing earnings and revenue over the last four quarters. From these figures, the markets have clearly expected more from Wells Fargo’s last four earnings announcements.

P = Poor 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

5.91%

0.37%

11.03%

8.73%

8.86%

Wells Fargo has been a relative underperformer year-to-date.

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Conclusion

Wells Fargo is a major bank in the United States that provides essential operational and growth services to consumers and businesses. The stock has seen a modest uptrend over the years and may be currently breaking higher. However, earnings and revenue figures have not left investors very convinced. Relative to its peers and sector, Wells Fargo stock has underperformed year-to-date. WAIT AND SEE what Wells Fargo does this quarter.

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