(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)
Wells Fargo & Co's (WFC) stock has risen by more than 14% since the end of April. But technical analysis suggests shares may be due to fall by as much as 9% in the weeks ahead.
The bigger problem may lie in the fundamentals of the business. Analysts have been slashing their earnings and revenue targets for the company since the middle of January. Additionally, the average price target has fallen as well.
Technicals Breaking Down
The stock had been rising in a trading channel since bottoming in April. But shares fell below the lower range of that channel at the start of September. Now shares are sitting above a support level at $57.20. Should the stock fall below that level of technical support, it may fall to roughly $52.50, a drop of almost 9% from the current price around $57.40.
The relative strength index has also been trending lower since the end of July, despite the stock continuing to rise, a bearish divergence. It suggests that the bullish momentum is leaving the stock.
Slashing Targets and Estimates
But that's not all, because analysts have been growing more bearish on the stock as well, the average price target on the stock has fallen to $62.80. That is down from approximately $66 in mid-January, a drop of almost 5%.
The price target reductions are a result of earnings estimates dropping. Earnings estimates for 2018 have fallen by almost 8% to $4.44, from $4.80 since the beginning of the year. Meanwhile, 2019 earnings estimates have decreased by approximately 3% to $5.18 from $5.33. Forecast for 2020 fall as well dropping by almost 7% to $5.77 from $6.19.
WFC EPS Estimates for Next Fiscal Year data by YCharts
The revenue outlook is weakening as well and expected to fall by almost 1% versus 2017 to $87.8 billion, down from a prior forecast of $90.2 billion. Meanwhile, revenue forecast for 2019 is down by more than 4% to $87.6 billion, while 2020 estimates drop by almost 8% to $89.6 billion.
Another headwind is the yield curve, which has flattened. The spread between the 10- Year U.S. Treasury Yield minus the 2- Year U.S. Treasury has fallen to 23 basis points. That is down from roughly 33 basis points in the middle of July.
Wells Fargo's stock had a nice run over the past few months, but it looks like it may be coming to an end.
Michael Kramer is the Founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer's bio and his portfolio's holdings. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance.