Will Wells Fargo See Its Stock Rise Post-Earnings?

With shares of Wells Fargo (NYSE:WFC) trading around $48, 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 reported record net income of $5.9 billion, or $1.05 per diluted common share, for first-quarter 2014, up from $5.2 billion, or 92 cents per share, for first-quarter 2013, and up from $5.6 billion, or $1 per share, for fourth-quarter 2013. “Our solid first quarter results again demonstrated the ability of our diversified business model to perform for shareholders,” said Chairman and CEO John Stumpf.

T = Technicals on the Stock Chart Are Strong

Wells Fargo stock has seen positive progress over the last several months. However, the stock is currently pulling back and may need time to stabilize. 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

20.5%

56%

54%

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

May Options

Flat

Average

June 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 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?

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

1.19%*

0.06%

-0.02%

1.76%

*As of this writing.

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

6.76%

2.57%

-11.9%

-5.03%

-2.9%

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 reported first-quarter earnings that beat expectations. The stock has been moving higher in recent quarters but is currently pulling back. 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.

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