Wells Fargo & Co (NYSE:WFC) shares are down 12.3% since September 1 as details of the company’s accounting fraud have come to light. At this point, WFC stock investors are asking themselves two questions: Should I sell my shares, and how much lower can WFC stock go?
Unfortunately, there are still a number of unknowns when it comes to WFC stock and the potential fallout from the fraudulent accounting scandal. At this point, WFC has paid $185 million in fines. It could get much worse before it gets better.
“Several additional investigations, lawsuits and fines have been announced, and some clients have pulled business from Wells, making the ultimate financial impact difficult to predict,” Raymond James analyst David Long wrote last week. In the same note, Raymond James downgraded WFC stock from “market perform” to “underperform.”
But, WFC stock investors are now left to determine what exactly “underperform” means. WFC stock has clearly been punished in the market. While WFC stock has declined 12.3%, “Big 4” U.S. bank rivals JPMorgan Chase & Co. (NYSE:JPM) and Citigroup Inc (NYSE:C) have at least delivered minimal gains since September 1, and Bank of America Corp (NYSE:BAC) is down less than 1%. At this point, has WFC stock been punished enough?
The WFC Stock Premium
Ever since the Financial Crisis, WFC has carried the reputation that is was the “responsible” one among the largest banks in the U.S. While other banks were gambling on subprime MBS derivatives, WFC was doing what typical banks do — making loans and collecting interest. This reputation is responsible for WFC stock trading at a valuation premium to its peers since the Financial Crisis.
The WFC scandal news broke on September 8 when the Consumer Financial Protection Bureau (CFPB) and the Los Angeles City Attorney, along with the Office of the Comptroller of the Currency (OCC) fined WFC $185 million related to the company opening more than 2 million fraudulent bank accounts.
There’s an old Wall Street bank stock rule of thumb that says investors should buy when price-to-book ratio dips below 1.0 and sell when it climbs above 2.0. As of September 8, WFC stock traded at a price-to-tangible book value (P/TBV) of 1.82. For comparison’s sake, JPM stock traded at a 1.40 ratio. BAC stock traded at a 0.97 ratio. Citigroup stock traded at a 0.75 ratio.
Raymond James is now anticipating WFC’s EPS will decline 1.5% year over year in fiscal 2017. However, conservatively assuming earnings are unaffected by the scandal, WFC stock could still take a big hit if it loses its “good behavior” premium.
WFC’s “Big 4” peers have an average P/TBV of 1.05. If WFC stock were to re-rate to be in line with its peers, it would trade down to a share price of $28.64.
What Should WFC Stock Investors Do?
That $28.64 number is…
Click here to continue reading
Want to learn more about how to profit off the stock market? Or maybe you just want to be able to look sophisticated in front of your coworkers when they ask you what you are reading on your Kindle, and you’d prefer to tell them “Oh, I’m just reading a book about stock market analysis,” rather than the usual “Oh, I’m just looking at pics of my ex-girlfriend on Facebook.” For these reasons and more, check out my book, Beating Wall Street with Common Sense. I don’t have a degree in finance; I have a degree in neuroscience. You don’t have to predict what stocks will do if you can predict what traders will do and be one step ahead of them. I made a 400% return in the stock market over five years using only basic principles of psychology and common sense. Beating Wall Street with Common Sense is now available on Amazon, and tradingcommonsense.com is always available on your local internet!
