Yahoo Finance Pros and Cons of Investing in Wells Fargo & Co. (WFC) Stock
Despite being one of the nation's largest banks, Wells Fargo & Co. (NYSE: WFC) enters 2018 under fire on multiple fronts, and its share price is showing some wear and tear as a result.
Its primary problems are on the regulatory front and with customer and investor perceptions, which have been mostly negative. It's still working to recover trust after a 2016 scandal in which it created as many as 3.5 million phony credit card and bank accounts for customers without their consent to boost sales figures and make more money.
The bank lost billions in market capitalization, fired 5,300 employees and was publicly scolded on Capitol Hill, where members of Congress berated CEO John Stumpf and accused the bank of breaking the trust of its customers. Stumpf retired from the bank weeks later.
[See: 7 of the Best Stocks to Buy for 2018.]
But headwinds linger for WFC stock.
Most recently, the U.S. Federal Reserve announced in February that it will limit Wells Fargo's growth to $2 trillion in assets until the bank "sufficiently improves its governance and controls." The Fed is also requiring Wells Fargo to replace four board members by the end of the year.
WFC stock at a glance. Founded in 1852 and headquartered in San Francisco, Wells Fargo operates 8,600 locations and 13,000 ATMs, along with digital banking services in 42 countries.
In the last year, WFC stock is up only 1 percent while its major competitors -- Bank of America Corp. ( BAC), Citigroup ( C) and JPMorgan Chase & Co. ( JPM) are up between 27 and 34 percent.
"WFC's price has been beaten down as a result of both the market pullback and the recent Fed announcement limiting its growth," says Robert Johnson, president and CEO of The American College of Financial Services in Bryn Mawr, Pennsylvania. "Wells Fargo has a tremendous network effect that is difficult to replicate in the financial sector. Historically, the financial sector has performed better than average in rising interest rate environments."
WFC's own take on the Federal Reserve ban, along with some favorable comments from ratings agencies, seems to have stabilized Wells Fargo stock price. In a Feb. 2 statement, the bank stated it was confident it would satisfy the requirements of the consent order with the Board of Governors of the Federal Reserve System. Timothy J. Sloan, the bank's president and CEO, points out the Fed order is not a reflection on the bank's current financial position, which he calls strong.
Ratings agencies agree to a point. Noting the Fed's $2 trillion asset cap -- a move that even Wells Fargo acknowledges could lead from $300 to $400 million in lost net income in 2018 -- Standard & Poor's recently cut the bank's credit rating from "A" to "A-" although S&P issued a "stable" call on Wells Fargo stock.
Pros of buying Wells Fargo stock. Most analysts that follow Wells Fargo stock see more positives than negatives. Of 28 analysts who are tracking WFC this month, four see the stock as a "strong buy," nine have a "buy" rating and 13 maintain a "hold" rating. Only two analysts have issued a "sell" call on Wells Fargo stock.
That includes Erika Najarian, a Bank of America analyst who reissued a buy rating after the Fed's ruling on WFC. "We dug deeply into earnings drivers at WFC, between now and 2020," Najarian says. "While we expect shares to be weak near-term, we conclude that earnings per share cuts of 2 to 3 percent are less than the implied after-market decline of 6 percent. We would view any potential weakness in the shares as a particularly attractive buying opportunity."
[See: 7 of the Best Bank Stocks to Buy for 2018.]
Najarian pegs the one-year price outlook on WFC at $69 per share, based on a decent rebound on Wells Fargo stock after the Fed fallout in the first week of February.
Plus, there's a school of thought that the storm has largely passed for Wells Fargo, and that any negative news is already baked into the cake.
"While the bad news is not good, the truth is that the customers who were going to leave Wells Fargo due to the scandal have for the most part already left," says Michal Strahilevitz, a professor of behavioral economics at the University of Wollongong in Australia. "The stock needed to take a hit, but I think it took more of a hit than it should because investors tend to overreact to both good and bad news."
Cons of buying WFC stock. While Wells Fargo faces a long uphill climb in terms of both customer and shareholder trust, there are likely better options out there in the large bank sector.
That's especially so in an increasingly robust economy, where investment banks like Goldman Sachs Group ( GS), Bank of America and JP Morgan aren't shackled, regulatory-wise, like Wells Fargo. A better economy translates into stronger banking bottom lines in lending, which helps WFC's competitors, who stand to benefit from loan customers leaving Wells Fargo. One study estimates Wells Fargo could lose up to $212 billion in deposits and $8 billion in revenue by the end of this year because of the fraudulent accounts scandal.
By and large, WFC's competitors aren't fighting any corporate culture and customer trust battles, and that counts for a great deal in a market environment where optics matter.
[See: 7 of the Best Blue-Chip Stocks to Buy for 2018.]
Bottom line. The takeaway on Wells Fargo? If you believe the worst is behind WFC, then its actual banking fundamentals are strong.
Consequently, if you can live with the Federal Reserve mandate, and the resulting long-term customer trust repercussions, Wells Fargo offers good potential in an ascending bank stock environment in 2018.
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