Will Wells Fargo Move Higher?

With shares of Wells Fargo (NYSE:WFC) trading around $46, 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 tiptoeing back into subprime home loans again. The bank is looking for opportunities to stem its revenue decline as overall mortgage lending volume plunges. It believes it has worked through enough of its crisis-era mortgage problems, particularly with U.S. home loan agencies, to be comfortable extending credit to some borrowers with higher credit risks. The small steps from Wells Fargo could amount to a big change for the mortgage market. After the subprime mortgage bust brought the banking system to the brink of collapse in the financial crisis, banks have shied away from making home loans to anyone but the safest of consumers.

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 highs for the year 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 above its rising key averages, which signals 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

16.11%

20%

18%

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

Put IV Skew

Call IV Skew

March Options

Flat

Average

April Options

Flat

Average

As of Friday, 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 minimal 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 Mixed 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 Q4

2013 Q3

2013 Q2

2013 Q1

Earnings Growth (Y-O-Y)

10.22%

12.5%

19.51%

22.67%

Revenue Growth (Y-O-Y)

9.89%

-3.3%

0.42%

-1.74%

Earnings Reaction

0.06%

-0.02%

1.76%

-0.79%

Wells Fargo has seen increasing earnings and mixed 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

1.43%

7.16%

-4.77%

-1.08%

1.68%

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 tiptoeing back into subprime home loans again. The stock has been moving higher in recent quarters and is now trading near highs for the year. Over the last four quarters, earnings have been rising while revenues have been mixed, 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.

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