With shares of Wells Fargo (NYSE:WFC) now only $3 away from their 52-week high it is a great time to investigate what is going on with this stock that is benefiting from the rise in interest rates. Wells Fargo has been quite profitable for some investors over say the past five years as the stock is up 125.1% in that timeframe, but it has been edging ever so slowly downwards since its peak in late 2015 as seen from the chart below. It has been a pretty good showing against an S&P 500 that has nearly trailed Wells Fargo the entire way up. Overall these bank stocks should do well in a rising interest rate environment, but it is important to examine the specific valuation, financial, and technical situations of Wells Fargo to see what is really going on with the stock.
The company currently trades at a trailing 12-month P/E ratio of 13.12, 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 12.91 is currently inexpensively priced for the future in terms of the right here, right now. Next year's estimated earnings are $4.1 per share and I'd consider the stock inexpensive until about $62. The 1-year PEG ratio (7.33), 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 1.79%.
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 2.87% with a payout ratio of 38% of trailing 12-month earnings while sporting return on assets, equity and investment values of 1.1%, 11.8%, and 8.8%, respectively, which are all respectable values. Because I believe the market may get a bit choppy here and would like a safety play, I believe the 2.87% yield of this company is good enough alone for me to take shelter in for the time being. The company has been increasing its dividends for the past six years at a 5-year dividend growth rate of 49.1%.
Click to enlargeLooking first at the relative strength index chart [RSI] at the top, I see the stock in overbought territory with a current value of 68.05 relative to the rest of the market. Usually a value of 70 indicates an overbought condition. I will look at the moving average convergence-divergence [MACD] chart next. I see that the black line is about to cross below the red line with the divergence bars decreasing in height which tells me bearish momentum is in the name. As for the stock price itself ($52.92), I'm looking at$55 to act as resistance and the 20-day simple moving average (currently $50.29) t o act as support for a risk/reward ratio which plays out to be-5% to 3.9%.
Fundamentally I believe the company to be inexpensively valued now on next year's earnings estimates and expensive on earnings growth expectations with practically no earnings growth projections. Financially the company does pay a good dividend and has decent financial efficiency ratios. On a technical basis the risk/reward ratio shows me there is more risk than reward right now. To me the uptrend appears to be getting tired right now, and negative momentum may prevail in the short-term.
I think the path of least resistance is to the downside for now and if you haven't initiated a position in the name yet then maybe writing the January $49 puts is a great way to enter if it gets exercised. By writing the $49 put an investor collects $0.49 in premium and if they want to use the proceeds to buy the $57.50 call for $0.30 I think that would be a great way to be long the stock. If the stock never sees the $49 mark and moves up an investor can cash in on the premium while perhaps make some money off the call option.
Disclaimer: This article is in no way a recommendation to buy or sell any stock mentioned. This article is meant to serve as a journal for myself as to the rationale of why I bought/sold this stock when I look back on it in the future. These are only my personal opinions and you should do your own homework. Only you are responsible for what you trade and happy investing!
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.