Wells Fargo NYSE:WFC will report earnings next week at a time when the banking giant's stock recently hit an all-time high and is beating the S&P 500 SP:SPX on a one-year and five-year basis, but trailing more recently. What does the stock's technical and fundamental analysis show?
Let's check it out:
Wells Fargo's Fundamental Analysis
WFC will be among one of the first major companies to report Q3 earnings, unveiling results next Tuesday as several large banks head to the tape.
A traditional money-center bank, Wells Fargo recently saw the Federal Reserve lift a punitive $1.95 trillion asset cap that the bank had faced since 2018 in response to a number of scandals at the firm. Problems dated back to 2016 and involved WFC setting up fake customer accounts, auto loans and mortgages, although all of that happened under previous management.
Current President and CEO Charles Scharf spent years since taking the job in 2019 proving to the Fed that the bank had cleaned up its act. Now, having the ability to manage more assets could potentially mean increased potential for WFC, especially at a time when net interest margin is the name of the game in banking.
For Q3, analysts expect Wells Fargo to post $1.53 in GAAP earnings per share on roughly $21.1 billion of revenue. That would represent a 7.7% gain on the $1.42 in GAAP EPS that the bank saw in the year-ago period, as well as about 3.7% growth from the $20.4 billion in revenues seen in the same period last year.
That may not seem like a big y/y revenue gain, but it would reflect the most aggressive annual growth that Wells Fargo has seen for any quarter in two years.
Meanwhile, 14 of the 20 sell-side analysts that I know of who track WFC have increased their earnings estimates since the quarter started. (Five have lowered their estimates, while one has made no changes.)
Three analysts rated five stars out of a possible five by TipRanks -- Bank of America's Ebrahim Poonawala, Wolfe Research's Steven Chubak and UBS's Erika Najarian -- also reiterated their "Buy" or "Buy-Equivalent" ratings just this month.
That said, Poonawala didn't set a price target, while Chubak and Najarian cut their WFC targets to $90 and $93, respectively. That's certainly a mixed bag of expectations from the analyst community.
Wells Fargo's Technical Analysis
How about the technicals? Well, here's WFC's chart going back some eight months and running through Monday afternoon:
Readers will see that from February into early summer, Wells Fargo developed what's called an "inverse head-and-shoulders pattern" of bullish reversal, marked with a jagged black line at the chart's left. This pattern had a $77 pivot vs. the $79.73 that WFC closed at Wednesday.
Wells Fargo then went right into what looks like a still incomplete "ascending-triangle" pattern of bullish trend continuance, marked with diagonal purple lines at the chart's right. This brought the pivot up to $85, and would presumably take analysts' price targets higher as well.
That said, the stock is currently struggling with both its 50-day Simple Moving Average (or "SMA," denoted by a blue line) and with the ascending triangle's lower trendline.
Whether Wells Fargo can hold those lines could have a lot to do with how professional managers treat that stock going forward.
Meanwhile, take a look at the secondary indicators that I placed on the above chart.
Wells Fargo's Relative Strength Index (the gray line at the chart's top) isn't overtly weak, but is running below what technical analysts would consider neutral.
The stock's daily Moving Average Convergence Divergence indication (or "MACD," denoted by the black and gold lines and blue bars at the chart's bottom) is even shakier.
The histogram of Wells Fargo's 9-day Exponential Moving Average (or "EMA," marked with blue bars) is below the zero bound, which is a short-term bearish technical signal.
And while both the 12-day EMA (the black line) and 26-day EMA (the gold line) are above zero (a bullish technical sign), the 12-day line has crossed below the 26-day line. That's traditionally a bearish signal.
An Options Option
Options traders who think WFC will hold its 50-day SMA line and make a run at the pivot might employ a bull-call spread in scenario. This involves buying a call option and selling a second call option that has a higher strike price, hoping for a moderate rise in the stock.
Here's an example:
-- Buy one Oct. 17 $80 call for about $2.65. This will expire after Wells Fargo's Oct. 14 earnings release.
-- Sell one October 17 $85 call for roughly $0.65.
Net Debit: $2.
This trade involves spending and risking $2 for the potential to make $3 (the difference between the two calls' strike prices minus the net debit.)
Traders willing to potentially purchase the shares at a discount might also add the sale of a put to the above trade. Example:
-- Sell one Oct. 17 put for about $0.55 at a $76 strike price (Wells Fargo's 200-day SMA).
New Net Debit: $1.45.
This combination offers as much as a 244% potential profit. However, the trader would risk potentially having to buy WFC at a $76.45 net basis.
(Moomoo Technologies Inc. Markets Commentator Stephen "Sarge" Guilfoyle was long WFC at the time of writing this column.)
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