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Is Wells Fargo Stock A Buy As Warren Buffett Continues To Cut Stake?

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Wells Fargo (WFC) is one of the world’s biggest banks. It’s been dogged by regulatory issues, and the coronavirus crisis delivered another blow, sending Wells Fargo stock sharply lower. Even Warren Buffett is losing patience. So is WFC stock a buy right now? Here is what fundamental and technical analysis says.

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Wells Fargo is one of the Big Four U.S. banks, along with fellow behemoths Bank of America (BAC), Citigroup (C) and JPMorgan Chase (JPM).

Founded in 1852, Wells Fargo’s history dates back to the California Gold Rush. Henry Wells, the first president of American Express (AXP), and William G. Fargo, its vice president, decided to form their own company. They made the move after American Express, at the time an express mail firm, balked at the idea of westward expansion.

These Businesses Keep Stagecoach Rolling

Wells Fargo’s Community Banking business serves consumers and small businesses, offering checking and savings accounts as well as credit and debit cards. It also makes home loans, auto loans, student loans and small business loans.

Wholesale Banking provides business banking services to mid-market and large corporations. Such firms generally have annual sales of $5 million and above. It specializes in serving the international needs of U.S. companies and the U.S. needs of multinational corporations.

Its Wealth and Investment Management business provides wealth management, investment and retirement products. Services include asset management, investment services, portfolio analysis and monitoring.

Wells Fargo Earnings

In mid-October Wells Fargo posted EPS of 42 cents, a decline of 61% vs. the same period a year ago. It also missed Wall Street views for 47 cents per share.  Revenue of $18.9 billion was better than expected however. MarketSmith data shows Wells Fargo posted $20.3 billion on the top line.

The provision for credit losses was $769 million, down from $9.5 billion in Q2. Net interest income fell 19% to $9.4 billion.

Community banking revenue fell 4.6% to $10.7 billion. Wholesale banking revenue dropped 19% to $5.6 billion. Wealth management revenue dropped 26% to $3.8 billion.

Wells Fargo and its peers are building up reserves as a cushion to cover loans vulnerable to default in light of the coronavirus crisis. As businesses are shut down and unemployment remains a problem, this puts business loans, auto loans and mortgages at risk.

Loan defaults are one issue, but narrowing interest spreads is another challenge. Banks rely on the spread between short-term and long-term rates for profit. Any changes in banks’ net interest income flows through to their bottom-line profits.

The poor results are continuing a worrying trend for Wells Fargo stock. Earnings per share have declined vs. a year earlier in the past five quarters.

Wells Fargo Stock Analysis

Wells Fargo stock has shed almost 50% of its value so far in 2020, though it has been making up some losses of late. The stock had previously attempted to rally in May, but plunged to its its worst levels in 11 years after a downtrend hit the stock in early June. It managed to sink even below its coronavirus crash lows.

The stock took a big hit, falling below its 50-day moving average once again, after an investigation by news organizations found some of the world’s most well-known financial institutions moved more than $2 trillion in suspicious transactions. This was despite the money’s ties to alleged militants, drug traffickers and corrupt officials. The transactions occurred between 1999 and 2017.

However it has now managed to retake this key technical benchmark. It has also just mounted its 200-day line for the first time since January.

MarketSmith analysis shows WFC stock sold off in above-average volume following its weak Q3 report. However it is on track to post a gain the fourth week in a row.

The relative strength line for Wells Fargo stock is just above its lows, which had previously not been seen since 1990. The RS line has been rising of late. WFC stock has been underperforming the broader S&P 500 index, especially since the 2008 financial crisis.

Big bank stocks generally have trouble outperforming the S&P 500 index over the long run, but Wells Fargo stock has been a notable laggard even among its peers.

WFC Stock Dreadful In This Key Rating

WFC stock currently has an abysmal IBD Composite Rating of 3. This puts it in the bottom 3% of all stocks tracked.

The Stock Checkup Tool does show that Wells Fargo earnings are better than its stock market performance, though this is not saying much. Its Relative Strength Rating is currently a dreadful 13 out of 99. This means WFC is outperforming only 13% of all stocks in the IBD database over the past 12 months.

Over the past three quarters Wells Fargo has seen earnings decline by 35%, reverse into a loss of 66 cents per share, and then improve to an EPS decline of 61%. This poor performance is in stark contrast to the average growth of 25% sought by CAN SLIM investors over a three quarter period.

And it looks set to get even worse, as analysts expect Wells Fargo’s full year earnings to collapse by a remarkable 92% to just 34 cents in 2020. They are looking for earnings to rebound with a 482% gain to $1.98 in 2021. But this would still be less than half the $4.53 full-year EPS it made in 2019.

And earnings estimates generally are currently even less reliable than usual, as businesses and analysts struggle to forecast the future given the swift, almost unprecedented economic downturn and recovery.

Warren Buffett Losing Confidence In WFC Stock

One big name investor who still backs Wells Fargo stock is legendary value investor Warren Buffett, though his patience seems to be running out. At the moment, Berkshire Hathaway (BRKB) holds 136.34 million shares, or 3.3% of its stock.

That’s down sharply from 323.21 million shares it held just a couple of quarters ago.

The latest cut is not the first made by the Oracle of Omaha. Berkshire Hathaway slashed its stake in Wells Fargo by nearly 15% in the last quarter of 2019.

It is now just the tenth most valuable holding in the legendary value investor’s portfolio. The list is topped by Apple (AAPL), Bank of America (BAC), Coca-Cola (KO) and American Express (AXP).

Berkshire is now no longer WFC’s biggest institutional backer. This dubious honor now belongs to index fund giant Vanguard, which owns 6.95% of its stock. In total just 28.6% of its stock is now held by institutions. CAN SLIM investors prefer to back stocks which are heavily backed by big money.

Analyst Rates Wells Fargo Stock

CFRA research director Kenneth Leon is rating WFC stock as hold, and is holding at 26 despite its disappointing earnings report.

“The Fed’s rate cutting has put pressure on WFC’s net interest income as margins, spreads, and volume may not offset significant declines in rates,” he said in an Oct. 24 research note. “Hurting from the Covid-19 impact are business lines that benefit from lower rates like commercial loan originations, credit cards, personal loans, and small business loans.

However he believes the firm will benefit from the influence of new CEO Charles W. Scharf going forward.

“While there is room for more improvement, particularly in serving the consumer, we think new leadership will put the bank on the right path to regain customer trust,” he said.

Former Bank of New York Mellon CEO Scharf took over the reins of the Wells Fargo stagecoach last October.

Meanwhile Raymond James analyst David Long has just upgraded Wells Fargo stock to to outperform from underperform. His price target is 32. He said headwinds stemming from the account opening scandal are beginning to rescind. He said he sees “numerous positive catalysts for the bank in the near to intermediate term.”

Wells Fargo Stock Is Not A Buy

Wells Fargo’s growth in earnings per share is well short of the 25% benchmark IBD research finds to be key to winning stocks. Analysts now see Wells Fargo earnings collapsing in 2020, with a rebound in 2021 not making up for the precipitous decline. Big backer Warren Buffett also seems to be losing confidence, and has been reducing his stake.

Even among big banks, WFC stock has been a longtime laggard vs. the S&P 500 index. The coronavirus stock market sell-off drove its stock price down to the lowest level since 2012, and it has now fallen even lower still. Weak earnings and dim future prospects meant it failed to hold the gains it made amid the confirmed stock market uptrend that began with a follow-through day on April 2. There is no clear buy point in sight, and no proper stock pattern has formed for now. On the plus side, it has managed to move back above its 50 and 200-day moving averages.

On the operations side, Wells Fargo still faces regulatory constraints, and the Federal Reserve’s rate cuts will keep net interest income depressed at the bank and across the industry.

Bottom line: Wells Fargo stock is not a buy.

Investors looking for true market leaders are urged to check out IBD Stock Lists, including the IBD 50 list of top performing stocks.

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