Wells Fargo Downgraded, but Here's Why You Should Still Buy the Stock

Raymond James has lowered its expectations for Wells Fargo, but the bank's stock continues to rise. Here's why the pessimists are dead wrong.
By Kat McKerrow ,

Wells Fargo (WFC) - Get Report is set to end the week on a positive note, surging more than 2% this morning. Investors who got in on Wednesday morning, when the stock was trading at its weekly low around $45 per share, could already be seeing gains of more than 4% -- not too shabby in two days.

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Especially when there has been some negative sentiment about the stock during those two days. Yesterday, financial analysts at Raymond Jamescut their rating for Wells Fargo stock to "market perform" from "outperform." In addition, the firm lowered its guidance for Wells Fargo's earnings-per-share (EPS).

The analysts also published rating downgrades for U.S. banks Bank of America (BAC) - Get Report and Umpqua Holdings (UMPQ) - Get Report .

Despite the downgrade and lowered expectations, Wells Fargo remains a great pick for investors looking to make profits from the U.S. banking industry. In fact, the bank currently has a very high return on equity (last year: 12.7%), making it the most profitable bank in the country.

The entire global banking industry was hard hit by the surprise results from the Brexit referendum. Wells Fargo, long considered one of the world's most stable banks, wasn't immune to the panic, despite its low exposure to the U.K. market. In the days immediately following the vote, Wells Fargo stock plunged by more than 8%.

However, the stock has since regained its steady footing, nearing pre-Brexit levels while other banks continue to flounder. Any dips such as this late-June drop are merely good opportunities for investors to grab extra shares at a discount.

Another benefit to owning Wells Fargo stock is the company's generous dividend yields. In 2015, Wells Fargo spent more than $13 billion on dividends and repurchasing shares -- more than half of its net income. And last week, the Federal Reserve approved the bank's capital plan that will allow it to distribute as much as 75% of its profits to its shareholders. This decision was reached after the Fed conducted an annual stress test on Wells Fargo and concluded that the bank is strong enough to continue lending even in the event of a major economic downturn.

Nor are we alone in our bullish outlook for Wells Fargo. Warren Buffett's legendary Berkshire Hathaway (BRK.A) - Get Report has made the bank the second-largest holding in its portfolio, behind only Kraft Heinz. Berkshire is also pushing the Federal Reserve to allow it to increase its stake further.

Wells Fargo is the world's strongest megabank. It's extremely well run and built to outlast any financial crisis. If you're going to own one banking stock in your investing portfolio, this is the best and safest bet. Don't pay too much attention to downgraded forecasts -- get in now, while shares are still relatively low, and be prepared to hold for some stellar profits.

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This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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