Stock of the Week
NYSE Symbol: WFC
Price as of 10/7: $49.21
The third quarter is in the books. The S&P 500 is up 18% year to date. An amazing rally on the backdrop of a global slowdown and impeachment inquiry for President Trump. The major averages are right back to where they stood last year at this time. The fourth quarter was unkind to Wall Street with the S&P 500 dropping nearly 20% ending the year with the worst December in nearly 100 years. Not sure the fundamentals look any better starting this fourth quarter particularly since the markets are near all time highs. In times like this value stocks may be a safer and more prudent play. This week we'll highlight an underperforming bank stock with a great dividend and a new catalyst. The featured stock is Wells Fargo.
Wells Fargo's stock has underperformed for several years for good reason. The company last year agreed to pay a $575 million civil settlement after admitting employees created millions of unauthorized customer accounts. In early 2018, the Federal Reserve issued a consent order barring Wells Fargo from expanding assets beyond their level at the end of 2017 until it can convince authorities it is addressing shortcomings.
At the end of the third quarter, Wells Fargo's stock jumped 4% to a six-month high after naming a popular and proven bank leader, Charles Scharf as their new CEO. Mr. Scharf was the CEO of New York Mellon and Visa before that. Before Visa, Mr. Scharf rose through the ranks at JPMorgan Chase as a Jamie Dimon protégé.
The turn around at Wells Fargo won't be easy. Scharf's to-do list is not short. Wells Fargo needs to convince the Federal Reserve to lift the restrictions on their cap growth, repair relationships with bank customers, cut expenses and grow earnings and sales once again.
The good news for investors is the valuation is compelling. Currently Wells Fargo's stock trades for 10.5 times earnings, 2.6 times sales and 1.2 times book value of $40 a share along with the best dividend yield among the big cap banks. Once the new CEO gets in place, he should be able to cut costs to boost earnings per share. Getting the Fed to lift their restrictions will only help improve earnings and sales going forward. In the meantime, shareholders can collect a 4% dividend while they wait.