Wells Fargo & Co (WFC) - Get Report reports quarterly results on Friday in bear market territory. My call is to buy this banking giant between its monthly value level at $44.95 and its quarterly pivot at $49.75, with a price target of its annual risky level at $63.29.
This money center bank is the third largest of four considered "too big to fail" and they began their turnaround with an earnings beat reported on Jan. 15. The stock is cheap with a P/E ratio of 10.60 and dividend yield of 3.74%, according to Macrotrends.
Wells Fargo closed Wednesday at $47.79, up 3.7% year to date and 11.1% above its Dec. 26 low of $43.02. The stock set its all-time intraday high of $66.31 on Jan. 29, 2018 and is in bear market territory 27.9% below this high.
Investors are aware that Wells Fargo has been fined several times due to numerous scandals. One result is a slippage from being the second largest of the four "too big to fail" money center banks. Data from the Federal Deposit Insurance Corporation (FDIC) show that this banking giant had $1.709 trillion in total assets at the end of 2018. This was a rise from $1,684 trillion at the end of the third quarter. This is a turnaround sign as the bank is increasing lending again.
Analysts expect Wells Fargo to earn $1.08 to $1.12 per share when they report before the opening bell on Friday, April 12. When the bank reported earnings for the fourth quarter on Jan. 15 they beat analysts' earnings estimates, which was a sign of a turnaround. Wells Fargo's scandals began in September 2016 when they disclosed that employees created millions of unauthorized accounts including credit card applications. The creation of fake-accounts spread to other banking products and investors lost confidence in the stock.
While there may be residual lawsuits from this checkered past an earnings beat on Friday should bring value buyers back given its dividend yield. Warren Buffett is Wells Fargo's largest shareholder with more that 440 million shares. One question is, who will be the next Wells Fargo CEO?
The Daily Chart for Wells Fargo
Courtesy of Refinitiv XENITH
The daily chart for Wells Fargo shows that the stock traded to its all-time high of $66.31 on Jan. 29, 2018 despite the scandals. Since then, the stock traded sideways to down and after a false "death cross" and a false "golden cross," a sustainable "death cross" was confirmed on Oct. 10, two days before its Oct. 12 earnings report.
A "death cross" occurs when the 50-day simple moving average declines below the 200-day simple moving average to indicate that lower prices lied ahead. On Dec. 3, the stock tested its 200-day SMA as a selling opportunity at $54.91. The stock traded as low as $43.02 on Dec. 26 and this day ended the "death cross" with a "key reversal" where the Dec. 26 close at $45.59 was above the Dec. 24 high of $45.10.
The close of $46.08 on Dec. 31 was the first major input to my proprietary analytics. From this analysis we still have an annual risky level at $63.29 and a semiannual risky level at $51.12, which was a pivot between March 18 and March 20. The close of $48.32 on March 29 was the latest input to the analytics and resulted in a monthly value level at $44.95 and a quarterly risky level at $49.75. These are the four horizontal lines on the chart.
The Weekly Chart for Wells Fargo
Courtesy of Refinitiv XENITH
The weekly chart for Wells Fargo is negative with the stock below its five-week modified moving average of $48.83. The stock is also below its 200-week simple moving average or "reversion to the mean" at $52.99, which was last tested during the week of Dec. 7. The 12x3x3 weekly slow stochastic reading is projected to decline to 44.86 this week from 55.04 on April 5.
Trading Strategy: Buy the stock between its monthly value level at $44.95 and its quarterly risky level at $49.75 for its dividend. Traders can reduce holdings on strength to its semiannual risky level at $51.12. Longer-term investors should hold a core position until the stock trades up to its annual risky level at $63.29.
How to use my value levels and risky levels:
Value levels and risky levels are based on the last nine weekly, monthly, quarterly, semiannual and annual closes. The first set of levels was based upon the closes on Dec. 31. The original semiannual and annual levels remain in play. The weekly level changes each week; the monthly level was changed at the end of January, February and March. The quarterly level was changed at the end of March. My theory is that nine years of volatility between closes are enough to assume that all possible bullish or bearish events for the stock are factored in. To capture share price volatility, investors should buy on weakness to a value level and reduce holdings on strength to a risky level. A pivot is a value level or risky level that was violated within its time horizon. Pivots act as magnets that have a high probability of being tested again before its time horizon expires.
Disclosure: The author has no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.