Is Wells Fargo a Solid Investment?

With shares of Wells Fargo (NYSE:WFC) trading around $49, 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.

A shakeup in management announced yesterday has analysts speculating on who will be the next CEO at Wells Fargo, Bloomberg reported. Wells Fargo yesterday named Chief Financial Officer Timothy Sloan the head of wholesale banking. Sloan has been CFO since 2011. Jennifer Thompson, an analyst at Portales Partners LLC, told Bloomberg that Sloan is an “up-and-comer” who could be on the fast track for CEO. Sloan is taking over wholesale banking from David Hoyt, who will retire after 32 years with the company. John Shrewsberry was named as Sloan’s replacement as CFO. The appointments “demonstrate the deep bench of high-caliber leaders at Wells Fargo,” CEO John Stumpf said in a statement.

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 trading sideways and may need time to consolidate before heading higher. 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

20.45%

76%

74%

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

May Options

Flat

Average

June 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 very 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 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), JPMorgan Chase (NYSE:JPM), and sector?

Wells Fargo

Bank of America

Citigroup

JPMorgan Chase

Sector

Year-to-Date Return

9.37%

10.69%

-7.82%

3.59%

4.95%

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 yesterday named Chief Financial Officer Timothy Sloan the head of wholesale banking. The stock has been moving higher in recent quarters, but is currently trading sideways. 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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