Is Wells Fargo the Healthiest Bank?

With shares of Wells Fargo (NYSE:WFC) trading around $40, is the company 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. As a major bank operating in the financial industry that is the backbone of most economies around the world, its need is undoubted. Look for Wells Fargo to provide financial services of various forms to growing entities and a growing consumer base worldwide.

T = Technicals on the Stock Chart are Strong

Wells Fargo stock has seen its stock break above a value range extending back a number of years. The stock is now trading near all-time high prices and sees no signs of slowing. 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.

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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

20.39%

90%

88%

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

Put IV Skew

Call IV Skew

June Options

Steep

Average

July Options

Steep

Average

As of today, there is an average demand from call buyers or sellers and high demand by put buyers or low demand by put sellers, all neutral to bearish over the next two months. To summarize, investors are buying a very significant amount of call and put option contracts and are leaning neutral to bearish 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 Q1

2012 Q4

2012 Q3

2012 Q2

Earnings Growth (Y-O-Y)

22.67%

24.41%

22.22%

17.14%

Revenue Growth (Y-O-Y)

-1.74%

6.52%

8.08%

4.43%

Earnings Reaction

-0.79%

-0.84%

-2.64%

3.22%

Wells Fargo has seen increasing earnings and revenue figures over the last four quarters. From these figures, the markets have had mixed 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 the sector?

Wells Fargo

Bank of America

Citigroup

JPMorgan Chase

Sector

Year-to-Date Return

19.08%

15.93%

30.36%

23.66%

21.16%

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

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Conclusion

Wells Fargo is a leading provider of financial services to consumers and companies around the world. The stock has recently broken above a multi-year price range and is trading near all-time high prices. Over the last four quarters, earnings and revenue figures have increased, which has produced mixed feelings among investors. Relative to its peers and sector, Wells Fargo has been an average year-to-date performer. Look for Wells Fargo to catch-up and OUTPERFORM.

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