Is Wells Fargo Invincible?

With shares of Wells Fargo & Company (NYSE:WFC) trading at around $38.45, 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:

C = Catalyst for the Stock’s Movement

James Paulsen, Wells Capital Management Chief Investment Strategist, had a lot to say about the industry as well as the economy in general when recently interviewed on CNBC. Of course, a lot of people have a lot to say about industries and the economy in general. However, James (or Jim) Paulsen has a stellar track record. He doesn’t seem to care about what all the talking heads are saying. He tells it like he sees it, and he definitely has access to more information than the average investor.

For those looking for a forecast, he did give one for the S&P by the end of the year, but we’ll get to that soon. When asked about the status of the economy, his basic point was that it’s all about confidence, and that confidence is growing, which is a positive. He also stated that confidence affects the financial sector more than any other sector.

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When asked about flat revenues, unemployment, and subpar guidance in corporate America, he stated that 15 months ago unemployment was close to 9 percent, job creation was poor, banks weren’t lending, and that the real estate market was in disarray. At that time, there was a lack of confidence.

He did make one bold statement, which was that the economy is now more sustainable and not as vulnerable to external shocks. This apparently has led to people paying higher multiples for stocks. However, is there something wrong with the statement? First of all, we don’t know how an external shock would affect the current market. Secondly, if confidence and multiples are higher, wouldn’t that mean a steeper fall? Just something to ponder. This isn’t meant in a cynical manner. It’s meant that it’s literally something to ponder. It’s unwise to mock those who have track records like James Paulsen.

As far as his target for the S&P 500, he feels it has the potential to hit 1700 by the end of the year. However, he does think stocks may struggle toward the end of the year, as there is increased pressure for the Federal Reserve to end QE. There is somewhat of a contradiction here because he also stated that that if the Federal Reserve doesn’t back off, it could create an inflationary crisis.

Is James Paulsen correct about confidence and the future of the economy? If so, the financials are only in the early stages of a great run. If not, then the future is uncertain.

Now let’s focus a little more on Wells Fargo and take a look at some comparative numbers. The chart below compares fundamentals for Wells Fargo, Bank of America Corporation (NYSE:BAC), and JPMorgan Chase & Company (NYSE:JPM). Wells Fargo has a market cap of $203.68 billion, Bank of America has a market cap of $141.56 billion, and JPMorgan has a market cap of $190.60 billion.

WFC

BAC

JPM

Trailing   P/E

10.92

31.00

8.91

Forward   P/E

10.09

10.14

8.40

Profit   Margin

24.82%

7.99%

25.20%

ROE

13.07%

2.62%

11.55%

Operating   Cash Flow

N/A

N/A

 N/A

Dividend   Yield

3.20%

0.30%

3.20%

Short   Position

0.80%

1.60%

1.00%

 

Let’s take a look at some more important numbers prior to forming an opinion on this stock.

E = Equity to Debt Ratio Is Normal         

The debt-to-equity ratio for Wells Fargo is very close to the industry average of 1.20

Debt-To-Equity

Cash

Long-Term Debt

WFC

1.15

$222.30 Billion

$186.88 Billion

BAC

1.35

$609.62 Billion

$617.76 Billion

JPM

1.58

$952.49 Billion

$722.93 Billion

 

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T = Technicals Are Strong  

Wells Fargo has been a steady performer over the past three years. However, Bank of America has been the big winner in this group over the past year.

1 Month

Year-To-Date

1 Year

3 Year

WFC

3.50%

13.30%

17.10%

31.73%

BAC

8.77%

12.25%

64.31%

-18.49%

JPM

3.78%

14.57%

22.47%

30.38%

 

At $38.45, Wells Fargo is trading above all its averages.

50-Day   SMA

36.97

100-Day   SMA

35.90

200-Day   SMA

34.92

 

E = Earnings Have Been Strong                                

Earnings have consistently improved on an annual basis. Revenue has been inconsistent, but 2012 was a nice bounce back year, which bucked the trend.

2008

2009

2010

2011

2012

Revenue   ($)in   billions

41.88

88.69

85.21

80.95

86.09

Diluted   EPS ($)

0.70

1.75

2.21

2.82

3.36

 

When we look at the previous quarter on a year-over-year basis, we see a decline in revenue, but an increase in earnings. However, neither move was significant.

 12/2011

3/2012

6/2012

9/2012

12/2012

Revenue   ($)in   billions

21.64

21.29

21.21

21.95

21.26

Diluted   EPS ($)

0.75

0.82

0.88

0.91

0.92

 

Now let’s take a look at the next page for the Trends and Conclusion. Is this stock an OUTPERFORM, a WAIT AND SEE, or a STAY AWAY?

T = Trends Might Support the Industry

Easing credit and an improved real estate market favor the industry. However, are these trends sustainable?

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Conclusion

As long as the stock market holds its own, Wells Fargo is a winner. If Wells Fargo happens to have a bad year, dividend payments will help shed investor tears. The only way Wells Fargo would thrust a dagger deep into the hearts of investors would be if the stock market crashed. However, even in that scenario, Wells Fargo would be one of the safer bets in the industry, and it would likely recoup those losses in the following years. This has already been proven.

All factors considered, Wells Fargo is a long-term OUTPERFORM.

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Disclosure: All content posted represents my opinion and views and should never be considered professional advice. You should do your own research and consult with a professional financial advisor before making any investment decisions. I do not have a position in this stock. I am currently short technology, financials, the Russell 2000, and the euro.