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Remember when I told you that I believed I could buy Wells Fargo (NYSE:WFC) at a lower price ("I'm going to buy a small batch in the stock for now and wait for a lower entry point before I begin to purchase a big lot of the stock")? Well, it is down 1.91% since that time while the S&P500 is up 4.71% in that timeframe. Wells Fargo is a bank holding company which operates in three segments: Community Banking, Wholesale Banking and Wealth, Brokerage and Retirement. On October 11, 2013, the company reported third-quarter earnings of $0.99 per share, which beat the consensus of analysts' estimates by $0.02. In the past year, the company's stock is up 25.79% excluding dividends (up 27.97% including dividends), and is beating the S&P 500 (NYSEARCA:SPY), which has gained 25.19% in the same time frame. With all this in mind, I'd like to take a moment to evaluate the stock on a fundamental, financial, and technical basis to see if it's worth buying more shares of the company right now for the financial sector of my dividend growth portfolio.

Fundamentals

The company currently trades at a trailing 12-month P/E ratio of 11.17, which is inexpensively priced, but I mainly like to purchase a stock based on where the company is going in the future as opposed to what it has done in the past. On that note, the 1-year forward-looking P/E ratio of 10.59 is currently inexpensively priced for the future in terms of the right here, right now. Next year's estimated earnings are $4.01 per share and I'd consider the stock inexpensive until about $60. The 1-year PEG ratio (3.06), which measures the ratio of the price you're currently paying for the trailing 12-month earnings on the stock while dividing it by the earnings growth of the company for a specified amount of time (I like looking at a 1-year horizon), tells me that the company is expensively priced based on a 1-year EPS growth rate of 3.65%. Below is a comparison table of the fundamentals metrics for the company from the time I wrote the last article to what it is right now.

Article Date

Price ($)

TTM P/E

Fwd P/E

EPS Next YR ($)

My Target Price ($)

PEG

EPS next YR (%)

08Aug13

43.27

11.73

10.76

4.02

60

2.53

4.63

06Nov13

42.44

11.17

10.59

4.01

60

3.06

3.65

Financials

On a financial basis, the things I look for are the dividend payouts, return on assets, equity and investment. The company pays a dividend of 2.83% with a payout ratio of 32% of trailing 12-month earnings while sporting return on assets, equity and investment values of 1.4%, 13.8% and 9.9%, respectively, which are all respectable values but nothing to go writing home about. Because I believe the market may get a bit choppy here and would like a safety play, I believe the 2.83% yield of this company is good enough for me to take shelter in for the time being. Below is a comparison table of the financials metrics for the company from the last time I wrote the article until now.

Article Date

Yield (%)

Payout TTM (%)

ROA (%)

ROE (%)

ROI (%)

08Aug13

2.77

26.5

1.4

13.6

9.9

06Nov13

2.83

32

1.4

13.8

9.9

Technicals

(click to enlarge)

Looking first at the relative strength index chart [RSI] at the top, I see the stock muddling around in middle territory with a value of 56.46 but with downward trajectory, which is a bearish pattern. To confirm that, I will look at the moving average convergence-divergence (MACD) chart next and see that the black line is about to cross below the red line with the divergence bars decreasing in height to the downside, indicating the stock is trading with downward momentum. As for the stock price itself ($42.44), I'm looking at $43.73 to act as resistance and $41.76 to act as support for a risk/reward ratio which plays out to be -1.6% to 3.04%.

Recent News

  1. The company agreed with the Federal Housing Finance Agency on a settlement of $335 million for mortgages it sold to Fannie and Freddie last week. The company says there will not be a charge in the fourth quarter for this settlement as it has already reserved the money for it.
  2. On 14Oct13 Jeffries analyst Ken Usdin cut earnings estimates for Wells Fargo by $0.10 for 2014 and 2015. Usdin maintained a "buy" rating on the stock but cut the price target from $48 to $47.
  3. Earnings were reported on 11Oct13 with earnings of $0.99 per share on revenue of $20.5 billion versus expectations of $0.97 per share on $21 billion in revenue.

Conclusion

Wells Fargo is the third largest brokerage in the country with over a trillion dollars under management in addition to the huge mortgage business it operates. The company keeps flying under the radar while the likes of JP Morgan Chase (NYSE:JPM) keep stepping into the limelight with all the settlements they keep coughing up. That's what I like about Wells Fargo, it goes about its business and keeps on chugging along. Although the company is great, the stock is losing ground on reduced earnings estimates for next year while being inexpensively valued on future earnings. Financially, the dividend payout ratio is low based on trailing 12-month earnings. I don't doubt management will be able to continue to increase the dividend going forward for now, and at a double digit clip. Based on future earnings, the dividend payout ratio goes down to around 30% (if the dividend is kept steady). The technical situation of how the stock is currently trading is telling me we might be seeing some downward pressure in the immediate future. The stock has bearish technicals, lowered future earnings estimates and has extremely low growth prospects. It's because of these reasons I will only buy a small position right here because I believe I can get it at a cheaper price in the near future.

Disclaimer: These are only my personal opinions and you should do your own homework. Only you are responsible for what you trade and happy investing!

Source: I'm Letting The Wells Fargo Wagon Pass For Now