Is Wells Fargo Poised to Head Higher?

With shares of Wells Fargo (NYSE:WFC) trading around $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:

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 Advisors’ Scott Wren says that while there will be volatility in the markets over the next several months he expects the markets to end 2014 roughly 7 percent higher than where they are today. Wren says volatility would be welcome because there was little pullback in the last nine months as markets moved higher.

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 all time highs and looks set to continue this path. 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 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

19.62%

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

January Options

Flat

Average

February 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 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 Q3

2013 Q2

2013 Q1

2012 Q4

Earnings Growth (Y-O-Y)

12.50%

19.51%

22.67%

24.41%

Revenue Growth (Y-O-Y)

-3.30%

0.42%

-1.74%

6.52%

Earnings Reaction

-0.02%

1.76%

-0.79%

-0.84%

Wells Fargo has seen increasing earnings and mixed revenue figures over the last four quarters. From these numbers, the markets have had conflicting feelings about 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

32.31%

39.20%

32.83%

32.24%

35.14%

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’s Advisors’ Scott Wren says that while there will be volatility in the markets over the next several months he expects the markets to end 2014 roughly 7 percent higher than where they are today. The stock has been moving higher in recent quarters and is now trading near all time high prices. Over the last four quarters, earnings have been rising while revenues have been mixed which has produced conflicting feelings among investors. Relative to its peers and sector, Wells Fargo has been an average year-to-date performer. WAIT AND SEE what Wells Fargo does this quarter.

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