Does Wells Fargo Belong in Your Portfolio?

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With shares of Wells Fargo (NYSE:WFC) trading around $50, is WFC an OUTPERFORM, WAIT AND SEE, or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

T = Trends for a Stock’s Movement

Wells Fargo is a diversified financial services company. It has three operating segments: Community Banking; Wholesale Banking; and Wealth, Brokerage, and Retirement. The company provides retail, commercial, and corporate banking services through banking stores and offices, the Internet, and other distribution channels to individuals, businesses, and institutions around the world. Wells Fargo also provides wholesale banking, mortgage banking, consumer finance, equipment leasing, agricultural finance, commercial finance, securities brokerage and investment banking, insurance agency and brokerage services, computer and data processing services, trust services, investment advisory services, mortgage-backed securities servicing, and venture capital investment.

Wells Fargo is set to end the legal tussle it has been encountering since 2011 for a settlement of around a minimum of $67 million in connection with the “robo-signing” fiasco. It was alleged that company officials conducted improper verification of documents in the home-foreclosure process. In a judicial foreclosure state, the foreclosure process requires that the lending institution must authorize the fact that the homeowner has defaulted on a mortgage that the lender owns. It needs to be authorized through submission of verified documents and written statement duly signed under affidavit by a bank official. The objective is to restrict the possession of houses by the bank in the event where the bank is unable to prove the ownership of the particular mortgage or where, in actuality, the homeowner has not defaulted to the extent stated in the foreclosure papers.

T = Technicals on the Stock Chart Are Strong

Wells Fargo stock has seen positive progress over the last several months. The stock is currently trading near all-time highs and looks set to continue. Analyzing the price trend and its strength can be done using key simple moving averages. What are the key moving averages? The 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages. As seen in the daily price chart below, Wells Fargo is trading above its rising key averages, which signals neutral to bullish price action in the near-term.

Source: Thinkorswim

Taking a look at the implied volatility (red) and implied volatility skew levels of Wells Fargo options may help determine if investors are bullish, neutral, or bearish.

Implied Volatility (IV)

30-Day IV Percentile

90-Day IV Percentile

Wells Fargo options

14.16%

3%

0%

What does this mean? This means that investors or traders are buying a small amount of call and put options contracts, as compared to the last 30 and 90 trading days.

Put IV Skew

Call IV Skew

June Options

Flat

Average

July Options

Flat

Average

As of Wednesday, there is average demand from call buyers or sellers and low demand by put buyers or high demand by put sellers, all neutral to bullish over the next two months. To summarize, investors are buying a small amount of call and put option contracts and are leaning neutral to bullish over the next two months.

On the next page, let’s take a look at the earnings and revenue growth rates and the conclusion.

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