It's Time To Reconsider The Long Case For Wells Fargo

Back in July, we wrote about how Wells Fargo (NYSE: WFC) was in serious trouble as management slashed their dividend amid poor quarterly numbers. At the time, shares were trading just below the $25 mark and interestingly, after two months of sideways actions, they’re still there.

Had investors been expecting that kind of drastic step and had the worst-case scenario already been baked into the share price? Based on the recent sideways action and consolidation in the stock, it certainly looks like it. Shares have bounced around in a narrow 10% range, even as the markets have both climbed to all-time highs and logged their worst days since March in the meantime.

When a stock takes a beating but doesn’t maintain its downtrend, there’s clearly a strong segment of buyers who are confident enough in the company’s long term prospects to keep buying shares at current levels. Sooner or later, having tested and bounced off the downside support enough times, shares turn north and start poking at the upside resistance. This is often seen in stocks that have been on investor’s naughty lists for some time, have missed out on recent rallies, and are lagging well behind their peers. Remind you of anyone?

Fresh Upgrade

The potential for a catch-up move by Wells Fargo in the short term hasn’t gone unnoticed. Only last week, Odeon Capital's Dick Bove upgraded shares to a Buy from Hold. As part of his long case, Bove cited the company’s position as the nation’s largest private housing lender in a time when the housing industry is booming. He acknowledged that he was going against the grain but noted how "it has a new management. It has tens of millions of customers. It has trillions of dollars. It is going to succeed. The stock does not recognize this. It should be bought."

He notes how the bank is trading at 63% of book value and how over the past three decades, it’s only ever traded this low on two other occasions; 1992 and 2009. This doesn’t add up when you take into account the fact that Wells Fargo is still one of the country’s biggest banks, with $159 billion in common equity, and $1.4 trillion in deposits. 

In his August filing, George Soros reported a purchase of Wells Fargo shares. With both Soros and Warren Buffet among the company’s more well-known shareholders, potential new investors couldn’t ask for two bigger bulls to have in your corner.

For investors considering getting involved, the risk/reward ratio is fairly favorable right now. There’s multi-month support around the $24 level as well as multi-year. In 2008, 2009, 2010, and 2011, the stock found a consistent cohort of bulls who were happy to snap up shares anytime they tested that level. As we head into the end of Q3, shares find themselves there again in a tightening wedge with the potential for a breakout growing.

Time To Play Catch-Up

If the coronavirus pandemic, two 20% drops in quarterly revenue, and an 80% cut to the dividend weren’t enough to take shares down below $24, then what will? The thinking has to be that short of a fresh calamity, they’re ready to start closing the gap on their banking peers to the upside.

Since the lows of March, Goldman Sachs (NYSE: GS) shares are up 56%, Bank of America (NYSE: BAC) are up 47%, and JP Morgan (NYSE: JPM) are up 30%. Over the same time period, Wells Fargo shares are essentially flat and without a doubt the outlier of the group. Even though tech stocks dominated the headlines for most of the summer, the banks are clearly still in vogue. And with the likelihood of further downside in Wells Fargo capped for the moment, thoughts turn to what it might be capable of if it starts picking up some steam.