(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)
Wells Fargo & Co. (WFC) is due to report results on Friday, and the outlook for the bank looks miserable. Technical analysis suggests shares could fall by about 7%, which would push the stock down 20% off its January high.
Options traders are overwhelmingly bearish on the stock as well and see shares falling by about 5.5% by the middle of September. The outlook for the bank doesn’t look particularly strong either when compared to some of the other major banks reporting results later this month.
The technical chart suggests the stock may fall to about $52.60 in the coming weeks, based on a bearish technical pattern called a rising wedge. Should the stock fall, as the pattern indicates, the price could drop to technical support at $52.60, before attempting to stabilize. The amount of daily volume has also been declining in recent weeks, an indication that conviction among the bulls may be waning. The relative strength index has also been trending lower since reaching overbought levels in late January, suggesting bullish momentum is coming out of the stock.
Another warning sign for the bulls is the big bearish bets in the options set to expire Sept. 21. The long straddle options strategy—a strategy of buying both a put and a call—suggests the price of the stock will rise or fall by about 7.5% from the $55 strike price, placing the stock in a trading range of $50.80 to $59.20. But the number of bets that the stock will fall outweighs the bets that shares will rise by 4 to 1, with roughly 33,000 open put contracts. A buyer of just the puts would need the stock to drop by 5.5% to $53.40 to break even if the options are held until expiration, because the price of the put cost about $1.40 per contract.
Analysts are looking for the bank's earnings to rise by about 9% in the second quarter, while revenue is expected to fall by 2%. Compare that to JPMorgan Chase & Co. (JPM), which is forecast to have second-quarter earnings increase by 30%, or Citigroup Inc. (C), which is expected to report 22% earnings growth. Meanwhile, both JPMorgan and Citigroup trade at the same or cheaper valuations than Wells Fargo.
JPM PE Ratio (Forward 1y) data by YCharts
The full-year outlook for Wells Fargo doesn't get much better, with earnings seen climbing by 12% on revenue that is expected to fall by about 1%.
It is hard to ignore the tepid growth Wells Fargo offers investors at its current valuation, and the reflection of that outlook is in the technical charts and the options betting. It will likely take a big beat and a healthy business outlook to turn the tide for this stock.
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.