Is Wells Fargo Poised to Head Higher?

With shares of Wells Fargo (NYSE:WFC) trading around $41, 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, the largest home lender in the U.S., recently reached a $869 million settlement with Freddie Mac over repurchase liabilities on loans Wells Fargo sold to Freddie Mac before 2009. According to a statement from Wells Fargo seen by Bloomberg, the settlement includes a cash payment of $780 million, and Wells Fargo had already set aside money to cover the cost. Government-owned firms Freddie Mac and Fannie Mae were forced to take a $187.5 billion bailout due to losses on bad mortgages during the financial crisis.

T = Technicals on the Stock Chart Are Mixed

Wells Fargo stock has been exploding to the upside over the last several quarters. The stock is currently pulling-back from highs for the year so it 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 between its key averages, which signal neutral 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

25.74%

86%

85%

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

October Options

Flat

Average

November 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 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 Q2

2013 Q1

2012 Q4

2012 Q3

Earnings Growth (Y-O-Y)

19.51%

22.67%

24.41%

22.22%

Revenue Growth (Y-O-Y)

0.42%

-1.74%

6.52%

8.08%

Earnings Reaction

1.84%

-0.79%

-0.84%

-2.64%

Wells Fargo has seen rising earnings and revenue figures over the last four quarters. From these numbers, the markets have expected more from 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

21.18%

22.61%

24.55%

19.11%

20.78%

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. A settlement has recently been reached between Wells Fargo and Freddie Mac in regards to repurchase on liabilities on loans. The stock has been exploding to the upside but is now pulling back from yearly highs. Over the last four quarters, earnings and revenues have been rising, however, investors have expected more during earnings announcements. 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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