Is Wells Fargo a Buy at Current Prices?

With shares of Wells Fargo (NYSE:WFC) trading around $42, 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 will cut 29,000 jobs in its mortgage sector, according to people familiar with the matter, and that number could grow as fewer people choose to refinance due to high interest rates. That number accounts for about 20 percent of Wells Fargo’s mortgage loan officers. A spokeswoman from the company told Bloomberg that Wells Fargo gave those employees a 60-day notice yesterday and is making efforts to give displaced employees other jobs within the company.

T = Technicals on the Stock Chart are Strong

Wells Fargo stock broke above a long-term selling area earlier this year. The stock is surging higher and is now trading slightly below all-time high prices. 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 slightly above its rising key averages which signal neutral to 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

19.74%

56%

53%

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

September Options

Flat

Average

October 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 significant 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 Q2

2013 Q1

2012 Q4

2012 Q3

Earnings Growth (Y-O-Y)

19.51%

22.67%

24.41%

22.22%

Revenue Growth (Y-O-Y)

0.42%

-1.74%

6.52%

8.08%

Earnings Reaction

1.84%

-0.79%

-0.84%

-2.64%

Wells Fargo has seen increasing earnings and revenue figures over the last four quarters. From these numbers, the markets have been expected a little more from Wells Fargo’s recent earnings announcements.

P = Average 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

23.46%

25.15%

25.63%

18.81%

20.84%

Wells Fargo has been an average relative performer, year-to-date.

Conclusion

Wells Fargo is a leading provider of financial services to consumers and companies around the world. The company is reportedly getting ready to cut a number of mortgage related jobs. The stock is currently trading slightly below all-time high prices. Over the last four quarters, earnings and revenue figures have been increasing, however, investors in the company have expected a little more. Relative to its peers and sector, Wells Fargo has been an average year-to-date performer. Look for Wells Fargo to OUTPERFORM.

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