Wells Fargo Could Book Outsized Returns

Well Fargo & Co. (WFC) is trading at a 10-month high on Tuesday after a key analyst upgrade. The banker has underperformed since 2016 when it got hit with a $185 million fine for creating 1.5 million fake deposit accounts and a half-million fake credit cards. Remediation efforts backfired after 5,300 low level employees were fired, in an effort to deflect blame from the executive office. CEO John Stumpf eventually resigned and gave up millions in compensation.

Bounce-back Effect

The company reports earnings on Friday morning, with Wall Street analysts looking for a profit of $0.61 per-share on $17.4 billion in Q4 2020 revenue. If met, earnings-per-share (EPS) will mark a 34% profit decrease compared to the same quarter in 2019. The stock has posted a negative 20% return since the scandal, underperforming the industry by an astounding 95%. Given these metrics, small improvements in operating results could generate significant upside.

UBS analyst Saul Martinez upgraded the stock to ‘Buy’, noting, “A positive narrative has emerged (for the banking sector): faster economic growth and expansionary fiscal policy drive rising net interest income (NII) and falling credit costs, while the resumption of share buybacks further boosts profitability and EPS. Wells Fargo is now our top pick … and is our sole Buy rated regional bank.”

Wall Street and Technical Outlook

Wall Street consensus has improved in 2021, with widening yields and higher interest rates set to underpin profits. It’s now rated as a ‘Moderate Buy’, based upon 9 ‘Buy’, 6 ‘Hold’, and 0 ‘Sell’ recommendations. Price targets currently range from a low of $27 to a Street-high $40 while the stock opened Tuesday’s U.S. session right on top of the median $34 target. Friday’s confessional could offer a perfect opportunity for analysts to lift ratings and targets.

Wells Fargo hasn’t bounced as strongly as bank sector funds since March 2020’s 11-year low, recouping just one-third of the losses posted since October 2019. However, price action has finally cleared resistance at the 200-day moving average, setting the stage for additional gains up to broken 2019 support in the low 40s. That marks potential upside of more than 30%, making it an interesting January Effect candidate.

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Disclosure: the author held no positions in aforementioned securities at the time of publication.