Sub-Prime Just Fine at Wells Fargo

Zacks

Wells Fargo (WFC) is creeping back into the sub-prime mortgage space. This is a different market than it was before the credit crunch. We’re not talking “No Doc” loans and 120% LTV deals. We’re talking about every day, hard-working, middle-class Americans getting a chance at a loan they can actually afford, albeit at a premium. This could help housing prices over the long term as discouraged potential home buyers may re-enter the market.

Fears about the rebirth of the credit bubble are certainly overblown at this point. This is the first large US bank to come out and ease lending standards. Wells Fargo is doing what banks are here to do to begin with; Lend money. There’s no problem in my eyes with a bank taking on incremental risk in order to increase profits. Too many banks got lazy in the wake of “Too Big to Fail” and decided they could print money with no risk by borrowing from the Fed at zero and buying Mortgage Backed Securities which were in turn backed by the full faith and credit of the US Government.

It’s good to finally see some liquidity rain a little further down the ladder. Now Main Street may be able to get a drink from the water fountain Wall Street has been dancing in for the last several years. With Wells as the first mover, perhaps other banks will enter the space as well. Maybe this is a sign that banking in the US is healthier than it has been since the credit crunch.

If the banking outlook continues to improve, look for PNC Financial (PNC) to stay strong. PNC has surprised earnings to the upside for eight quarters in a row. This Zacks Rank #2 (Buy) has seen 13 analysts raise estimates for the current year earnings. In Chicago, we have seen PNC branches pop up almost as frequently as Chase. It seems impossible to look down any street without seeing some sort of blue awning.

The chart looks good too. Here we have several ways to participate in the next potential run for this stock. First you have heavy resistance at $78 in April 2013. The stock sold off to $71 before catching a bid again and restesting this level in late November. Another failure and pull back to $74 and then the assault began. Now we’ve smashed through and confirmed $78 with the support in early February. Here we had the perfect storm, pull back to 25x5 SMA, stochastics oversold, bullish crossover and boom we started higher. Overall we still sit in a major uptrend for the stock and todays sell off to $81.55 looks like we just opened too high. Camp out a stop on the south side of $78 and this provides an excellent risk/reward opportunity.

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Another bank on the rise is Fifth Third Bank (FITB). Fifth Third is in the same tier as PNC Bank, in that space between the big banks like B of A and Chase, and the smaller regional banks that struggled through the crisis. FITB, like PNC, is a Zacks Rank #2 (Buy) and has seen some strength in the stock as of late.

FITB is currently trading just shy of the 52-week high near $22. The last pull back saw the stock drop less than $1.50. If the stock can break through $22 we could see $25 in a heartbeat. There are some areas of caution here that we don’t see in the PNC chart. While we are above the 25x5, the pace of the ascent has slowed and the 25X5 is sideways, warning of a range bound pattern for the stock. I wouldn’t be surprised if FITB tracks down to retest the $20.50 level, giving a better price level to initiate a position or add more. Given the relatively light dividend at 2.2% I would wait to pull the trigger rather than ride it up and down. 2.2% is not enough in my eyes to compensate me for the potential volatility we could see should the stock lock in a range.

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