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Saturday, January 28, 2023

Avoid Wells Fargo Stock Before Its Earnings Report

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On June 25, the Federal Reserve announced the results of its annual stress tests and additional sensitivity analyses for banks, such as Wells Fargo (NYSE:WFC). Following speculation about the bank’s dividends, on June 29, the California-based bank cut its dividend for the third quarter. Now, investors in Wells Fargo stock are wondering whether WFC belongs in a long-term portfolio.

Avoid Wells Fargo Stock Before Its Earnings Report

Source: Ken Wolter / Shutterstock.com

The bank is expected to release second-quarter earnings results in mid-July. Now that the stock does not serve the needs of passive-income seekers, I’d wait to analyze the quarterly results.

Between now and the release of the financials, Wells Fargo stock is likely to be volatile with a downward bias.

What to Expect From Earnings

Wells Fargo has close to $2 trillion in assets. Net income in its first-quarter earnings was $653 million and diluted earnings per share was 1 cent, both steep drops from a year ago when the bank reported quarterly earnings of $5.9 billion and EPS of $1.20.

Chief Executive Officer Charlie Scharf highlighted the question marks brought about by the pandemic. “For our customers, we’ve suspended residential property foreclosure sales, offered fee waivers, and provided payment deferrals, among other actions,” he said.

The bank reports net income in three segments:

  • Community banking (net income decreased to $155 million from $2.82 billion year over year).
  • Wholesale banking (net income decreased to $311 million from $2.77 billion).
  • Wealth and investment management (net income decreased to $463 million from $577 million).

Investors were not impressed with the results and following the earnings release, Wells Fargo stock sold off. In the second-quarter results to be released in several days, the Street would like to see what further impact has there been on earnings as a result of the Covid-19 lockdown measures as well as economic developments.

The financial industry is highly cyclical and thus susceptible to changes in economic climate. Variables such as interest rates, economic growth, global health, political and trade worries and activity in the housing markets can, nonetheless, impact a bank’s stock price. There will likely be daily price swings in WFC shares as news headlines change.

Wells Fargo Has a Rocky Past

InvestorPlace’s Louis Navellier recently wrote in detail about Wells Fargo’s past and current problems. He highlights, “Wells Fargo has a checkered history, at best. It’s been in trouble with financial regulators and Congress for years, dating back to the mortgage crisis that launched the Great Recession of 2008-09.”

Recent research by Brian Tayan of Stanford University takes a closer look at the 2013 cross-selling scandal. It was initially alleged that a number of employees in southern California were using aggressive tactics to meet the bank’s daily cross-selling targets. However, the problems went beyond a couple of employees and became an issue of corporate culture.

“Although the financial impact was trivial, the reputational damage proved to be enormous,” Tayan wrote. “When CEO John Stumpf appeared before the U.S. Senate, the narrative of the scandal changed significantly. Senators criticized the company for perpetuating fraud on its customers, putting excessive pressure on low-level employees, and failing to hold senior management responsible.”

Over the past several years, Wells Fargo settled the financial side of the scandal with various government and state entities as well as consumers. Yet, Wall Street has been questioning the state of corporate governance at the bank. And investors are not happy that the bank makes headlines with accountability issues.

In case the current financial climate becomes conducive for yet another corporate scandal, investors in Wells Fargo stock may simply decide to throw in the towel for now.

What Could Derail Wells Fargo Stock?

Over the past decade, Wells Fargo stock has mostly reflected various issues the bank has faced. Between 2014 and early 2020, WFC stock has mostly traded within a range of $45 and $60.

Amid the difficulties, many long-term investors have possibly chosen to stay with the group, in part due to its robust dividends. Now that the passive income element is gone, many dividend-seeking investors may look for alternatives.

WFC stock started 2020 around $53. On March 23, it was around $25. Although the shares went over $33 in early April, on May 13, they hit a 52-week low of $22. Now Wells Fargo stock is once again hovering at $25.

Short-term technical charts indicate Wells Fargo stock is likely to trade a range between $22.50 and $27.50.

If you are currently a shareholder, you may want to ride the wave. Alternatively, if you are experienced with options, you may initiate a covered call.

An ATM covered call position, for example, with a six-week time horizon could give you time to analyze the quarterly results. An August 21-expiry covered call would also decrease the volatility in your portfolio, offer some downside protection, and also enable you to participate in a potential up move.

The Bottom Line on WFC Stock

This has not been a great year for Wells Fargo stock. Year-to-date, WFC shares are down over 50%. As the earnings season moves forward, many investors may be wondering whether they should add the battered shares to their portfolios.

There is likely to be more volatility in Wells Fargo stock in the coming weeks. Therefore, if you are not currently a shareholder, you may want to wait for a potential decline in price before committing new capital into the shares.

Tezcan Gecgil has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education, including a Ph.D. degree, in the field, she has also completed all 3 levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation. As of this writing, Tezcan Gecgil did not hold a position in any of the aforementioned securities.

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