Where Will Wells Fargo Go Post Earnings?

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With shares of Wells Fargo (NYSE:WFC) trading around $45, 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 reported diluted earnings per common share of $3.89 for 2013, up 16 percent from $3.36 in 2012. Full-year net income was $21.9 billion, compared with $18.9 billion in 2012. For fourth-quarter 2013, net income was $5.6 billion, or $1 per share, compared with $5.1 billion, or 91 cents per share, for fourth-quarter 2012.

“Wells Fargo had another outstanding year in 2013, including strong growth in loans and deposits, and double-digit growth in earnings,” said Chairman and CEO John Stumpf. “In the five years since our merger with Wachovia, we have grown our businesses, invested in our franchise’s future and contributed to the U.S. economy’s recovery. Our 264,000 team members made it possible through their strong commitment to our consumer, small business and commercial customers, and the communities they serve around the world. Strong earnings power and capital levels, and an improving economic outlook are major reasons why we look ahead to 2014 with optimism.”

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 this path. 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.

WFC

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

15.53%

0%

0%

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

Put IV Skew

Call IV Skew

February Options

Flat

Average

March Options

Flat

Average

As of Tuesday, 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 minimal 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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