Summary
- WFC 3Q compared fine to peers, and the stock is cheap.
- CEO Scharf is hiring key management players for the under-formation recovery strategy.
- WFC's core franchise is in shape, and the stock offers a recovery play in a sector that currently faces an uninspiring economic picture.
- I am long Wells Fargo (NYSE:WFC). The third-quarter call gave an encouraging update, and in this article, I update the buy case for the shares.
WFC stands out in a sector that is under some pressure
Why own bank stocks at all? Banks face a prolonged low rate environment and a slow economy. While the economy is recovering from the early spring lockdowns, the outlook is unclear. COVID-19 is surging, and the US faces a political transition and, therefore, policy uncertainty.
I generally find REITs more attractive than banks at present due to this macro environment. So does Warren Buffett, who has cut a lot of bank positions but gone longer REITs.
Within banks, I favor names that are discounted to peers and have some fundamental work to do to improve performance. Among the big caps, WFC is one of these. They offer cheaper valuations and significant upside if they catch up leading peers to a material degree.
The sources of pressure in WFC are well known. For any bargain hunters new to this stock, they are:
- Legacy issues around mis-selling and internal customer care governance
- A resultant asset cap imposed by the Fed
- An elevated expensive base due to remedial action and legal redress
- More recently, sharp pressure on revenue lines due to the pandemic
I wrote a series of articles on WFC in the late summer looking at ways of it coming back and emphasising its strengths, which remain powerful in terms of customer franchise.
Addressing the question of whether WFC could double, I said this:
WFC needs four things to happen if its stock price is to double from here.
- WFC gives the market concrete targets for cost improvements and shows it is moving toward them
- The asset cap is lifted after WFC meets the Fed's governance thresholds
- WFC catches up with BAC and peers in valuation as it delivers
- The whole sector re-rates when the economy emerges from the COVID crisis
Clearly, the first two of these are within WFC's control (timing of the asset cap lift isn't, but the conditions for it to be granted are), the second two relate to banks in general.
