The Buying Case For Wells Fargo is Getting Stretched

Wells Fargo (NYSE:WFC) reports earnings on January 15 before the market opens. Analysts expect the bank to deliver earnings per share of 59 cents on revenue of $18.11 billion. Looked at from a year-over-year (YOY) perspective, the numbers aren’t that impressive. But any comparisons of the economy today with that in January 2020 is mostly a math exercise. Or to paraphrase in Shakespeare, it’s a tale of sound and fury signifying nothing.

However, if those numbers stand up, Wells Fargo will continue to show recovery from the depths of the pandemic. And investors are expecting that the best may be yet to come for the once beleaguered bank.

Optimism Is On the Rise

The existence of multiple Covid-19 vaccines has been a literal shot in the arm for analysts that are looking for reasons to justify their hopeful outlook. President-Elect Joe Biden has an aggressive goal of administering 100 million shots in his first 100 days. All of this points to the hope (there’s that word again) that businesses can re-open, employees can return to work, and loan losses will be blunted.

However, investors have been bidding up Wells Fargo stock for another reason. Simply put, Wells Fargo is out of the penalty box, sort of. The Federal Reserve gave Wells Fargo a Christmas present when it told the bank it could resume its share buyback program and it could resume paying dividends.

Now the gift did come with a very large string attached. In this case, the total dollar amount allocated to buybacks and dividends can’t exceed the average of what the bank earned in profit on a YOY basis.

But Is the Economy Ready to Grow?

Think of the economy like a rubber band. For the majority of 2020, the rubber band was being pulled back. This is the contraction that was happening as millions of Americans, along with many businesses were forced out of work and out of business. This put a lot of potential energy into the economy. Like that rubber band, the idea of pent-up demand was literally quivering in investors’ hands.

However back in the merry, but perhaps naïve, month of May, many analysts were forecasting a V-shaped recovery. But every time they let go of the rubber band, it didn’t shoot across the economy like a missile. In fact, in many areas there has been a maddening failure to launch.

And this has meant like the legendary Sisyphus the analysts keep pulling that rubber band back waiting for there to be enough juice to send the economy soaring.

Bank stocks have been largely like that rubber band. Despite the bleak state of the economy, the range of outcomes with a bank stock is fairly narrow. And that means that even though Wells Fargo stock underperformed the broader market, as expected, the stock is still a favorite among many hedge funds.

However, the banks have been waiting for a recovery that has been uneven.

Wells Fargo Is Still In a Holding Pattern

WFC stock is climbing heading into earnings and I would suspect it will go even higher if the report comes in as expected. But the market has been largely bidding up Wells Fargo stock because it’s a relatively inexpensive stock compared to other bank stocks.

 In recent days, the stock has broken past two areas of resistance and if it makes it past $35 after earnings, it could test the $40 per share level.

But if this happens, it may be a case of releasing the rubber band too early. There is still a lot of uncertainty regarding the virus and the short-term effect it will have on our economy. Both could dash the hopes of many investors.  In which case, the stock price may drop down below $30. In fact the consensus price target of analysts is $32.46 which would be about a 7% drop from where the stock trades at as of this writing.