• Subscribe
  • Log In
  • Home
  • Daily Diary
  • Asset Class
    • U.S. Equity
    • Fixed Income
    • Global Equity
    • Commodities
    • Currencies
  • Sector
    • Basic Materials
    • Consumer Discretionary
    • Consumer Staples
    • Energy
    • Financial Services
    • Healthcare
    • Industrials
    • Real Estate
    • Technology
    • Telecom Services
    • Transportation
    • Utilities
  • Latest
    • Articles
    • Video
    • Columnist Conversations
    • Best Ideas
    • Stock of the Day
  • Street Notes
  • Authors
    • Bruce Kamich
    • Doug Kass
    • Jim "Rev Shark" DePorre
    • Helene Meisler
    • Jonathan Heller
    • - See All -
  • Options
  • RMPIA
  • Switch Product
    • Action Alerts PLUS
    • Quant Ratings
    • Real Money
    • Real Money Pro
    • Retirement
    • Stocks Under $10
    • TheStreet
    • Top Stocks
    • TheStreet Smarts
  1. Home
  2. / Investing
  3. / Stocks

Why I'm Hitching My Wagon to Wells Fargo

Here's how I'd trade the stock after the bank's latest earnings.
By STEPHEN GUILFOYLE
Jul 14, 2021 | 12:24 PM EDT
Stocks quotes in this article: WFC, JPM, BAC

You have heard or seen me mention the turnaround story at Wells Fargo (WFC) under President and CEO Charles Scharf often enough.

Scharf has been hampered since he took the job in September 2019 by the bank's reputation and by the Fed's imposition of a hard $1.95 trillion asset cap in the wake of the fake accounts scandal, not to mention the onset of a global pandemic. Steadily, Scharf set out to change the culture, and reduce spending. Slowly, it now becomes apparent that, perhaps, there is a light at the end of this bank's long tunnel.

In banking, the "efficiency ratio" is the metric that measures operating expenses as a percentage of revenue generation. This is how investors gauge how "lean and mean" a bank is running. For the second quarter reported Wednesday morning, Wells Fargo ran with a 66% efficiency ratio, down from 77% a quarter earlier. That's a lot of progress in three months.

The light at the end of this tunnel may or may not be all that near, but we can see it from here. First time in a while.

The Quarter

In the second quarter, Wells Fargo reported earnings of $1.38 per share, crushing estimates that for the most part ran below a buck. Revenue generation landed at $20.27 billion, beating Wall Street estimates by more than $2.5 billion, and good for year-over-year growth of 10.9%.

Similar to other banks such as JPMorgan Chase  (JPM) and Bank of America (BAC) , Wells Fargo released a large chunk of cash ($1.64 billion) from reserves set aside last year in preparation for pandemic-related loan losses that never materialized. This greatly enhanced profitability. On that note, one year ago, for second-quarter 2020, WFC reported a loss of $0.66 per share, so this was a quarter of positive reversal comparatively.

Unfortunately, also like other big banks, loan growth has been tough, falling from $971.3 billion a year ago to $854.7 billion, while deposits increased from $1.39 trillion to $1.44 trillion. This left net interest income at $8.8 billion, flat sequentially, but down from $9.89 billion a year earlier. Net interest margin decreased to 2.02% from 2.05% for the first quarter and 2.25% for second-quarter 2020..

The plan all along has been to reduce what was the bank's $54 billion annual expense base over several years. There has been talk that Wells Fargo might recognize as much as $3.7 billion this year. That's where Scharf has made the most progress. Branches have closed. Office space has been reduced. Non-core businesses are being sold, and unfortunately some people have lost their jobs. Headcount shrank by a rough 5,000 for the three-month period.

The Charts

Readers will see the stock rallied from a low of $20.76 last October to a high of $48.13 this past May, picking up a cool 132% over that time. A 38.2% Fibonacci retracement would take the shares down to about $37.62.

A funny thing happened on the way.

At first glance, I thought I saw a consolidating base pattern forming after the peak in May. Zooming in, however, I think I see a closing pennant, as support has moved from $41.50 to $42, and as the 21-day exponential moving average (EMA) formed short-term resistance.

My Thoughts

I think Wells Fargo is setting up for an explosive move.

Reminder, explosives for WFC would be a couple of bucks, not $10 or $20. Yes, theoretically, the move could be down to the Fib level below $38. However, I believe that the 21-day EMA at $4 and the 50-day simple moving average (SMA) at $45 are lining up as either a brick wall, or potentially a catalyst.

I am long the stock. My price target is $49. Right now the WFC $37.50 puts are worth about $0.70. That sounds like a worthy sale to me.

(WFC is a holding in Jim Cramer's Action Alerts PLUS member club. Want to be alerted before Jim Cramer buys or sells WFC? Learn more now.)

Get an email alert each time I write an article for Real Money. Click the "+Follow" next to my byline to this article.

At the time of publication, Guilfoyle was long WFC equity.

TAGS: Corporate Governance | Earnings | Investing | Markets | Stocks | Technical Analysis | Trading | Value Investing | Banking | U.S. Equity

More from Stocks

Let's Update 3 Recent Trades on Meta, Gold and Bumble

Ed Ponsi
Aug 12, 2022 7:00 AM EDT

It's clean-up time.

A Win-Win for the Bulls and the Bears

Helene Meisler
Aug 12, 2022 6:00 AM EDT

Let's look at breadth on the S&P 500, the put/call ratio, the bonds, the overbought market, and more.

Making Sense of Irrational Market Moves

James "Rev Shark" DePorre
Aug 11, 2022 4:55 PM EDT

Has this recent very powerful rally created a supply of underinvested bulls who are anxious to buy pullbacks and dips?

I Smell a Play With Clarus Corp.

Mark Sebastian
Aug 11, 2022 2:42 PM EDT

Is there a possible buyout? A looming breakout? Let's see.

Disney: Will It Be Space or Splash Mountain for the Stock?

Bruce Kamich
Aug 11, 2022 1:31 PM EDT

Let's check the charts after the company's better-than-expected quarterly results.

Real Money's message boards are strictly for the open exchange of investment ideas among registered users. Any discussions or subjects off that topic or that do not promote this goal will be removed at the discretion of the site's moderators. Abusive, insensitive or threatening comments will not be tolerated and will be deleted. Thank you for your cooperation. If you have questions, please contact us here.

Email

CANCEL
SUBMIT

Email sent

Thank you, your email to has been sent successfully.

DONE

Oops!

We're sorry. There was a problem trying to send your email to .
Please contact customer support to let us know.

DONE

Please Join or Log In to Email Our Authors.

Email Real Money's Wall Street Pros for further analysis and insight

Already a Subscriber? Login

Columnist Conversation

  • 08:44 AM EDT PETER TCHIR

    CPI Beats Expectations, But Maybe Not the 'Whisper'?

    Slightly better-than-expected inflation across the...
  • 01:44 PM EDT STEPHEN GUILFOYLE

    This Holding Lights Up With Strong Earnings

    Check out the latest from TheStreet's Stocks Under...
  • 09:24 AM EDT PETER TCHIR

    Jobs Report Reaction: Incredibly Strong, But Questions to Ask

    An incredibly strong July jobs report. Not only d...
  • See More

COLUMNIST TWEETS

  • A Twitter List by realmoney
About Privacy Terms of Use

© 1996-2022 TheStreet, Inc., 225 Liberty Street, 27th Floor, New York, NY 10281

Need Help? Contact Customer Service

Except as otherwise indicated, quotes are delayed. Quotes delayed at least 20 minutes for all exchanges. Market Data & Company fundamental data provided by FactSet. Earnings and ratings provided by Zacks. Mutual fund data provided by Valueline. ETF data provided by Lipper. Powered and implemented by FactSet Digital Solutions Group.

TheStreet Ratings updates stock ratings daily. However, if no rating change occurs, the data on this page does not update. The data does update after 90 days if no rating change occurs within that time period.

FactSet calculates the Market Cap for the basic symbol to include common shares only. Year-to-date mutual fund returns are calculated on a monthly basis by Value Line and posted mid-month.

Compare Brokers

Please Join or Log In to manage and receive alerts.

Follow Real Money's Wall Street Pros to receive real-time investing alerts

Already a Subscriber? Login