High-quality stocks are generally an investor’s best friend when the market experiences an upheaval. Investors bank on the strength of these stocks, expecting them to survive the peak of volatility.
Even the usually left out banking stocks like Citigroup Inc. C and JPMorgan Chase & Co. JPM become investor favorites, and not without reason. Quality investment in companies with strong fundamentals and stable dividends is a rational approach. But one should also note that such stocks are usually highly correlated with the macro-economic environment, which is reflected in their financial results. They rise on expectations of positive news, but plunge steeper when uncertainty looms and sentiments weaken.
Biggies like Citigroup, JPMorgan and The Goldman Sachs Group, Inc. GS have fallen over 10% in the past 3 months as against a near 9% fall in the Dow Jones index. In fact, most of these big banks anticipate a slump in trading revenues for the third quarter triggered by the wide-spread uncertainty. Coming ahead of the earnings season, this is definitely not an encouraging prospect.
However, there is one large-sized bank, which continues to combat industry headwinds as well as capitalize on the improving U.S. economy - Wells Fargo & Company WFC. More interestingly, Wells Fargo is seeing solid estimate revision activity recently, with 1 upward revision against no downward revision in the past 30 days. JPMorgan, on the other hand, has seen 4 estimates moving south during the same time period, while 2 estimates have gone down for Citigroup.
Why is Wells Fargo Better?
• Its Business Model Is A Savior: Wells Fargo primarily focuses on traditional banking practices, i.e. to attract deposits and make loans. This is relatively simpler compared with companies like JPMorgan and Goldman, which engage in complex businesses inlcuding investment banking and trading.
As of Jun 30, 2015, Wells Fargo had $888.5 billion in loans and $1.2 trillion in deposits. A sturdy balance of low-cost deposits is an added advantage amid a near-term possibility of a rate hike. Further, Wells Fargo leverages its highly customer-centric business by maximizing cross-selling of its products.
Additionally, the bank has a well-diversified revenue stream for fee-based income, ranging from broker advisory, trust and investment management as well as investment banking income.
• Improving Credit Quality: Wells Fargo pays particular attention to credit quality, given its traditional banking approach. As a result, credit metrics continue to normalize, with net charge-offs for the most recent quarter reaching the lowest level in 20 years. Strengthening finances of consumers, along with an improving housing market, will likely further enhance these metrics.
Wells Fargo’s net charge-offs ratio of 0.45 (for the second quarter of 2015) compares favorably with 0.66 for JPMorgan and 1.27 for Citigroup.
• Prudent Expense Management: Wells Fargo’s expense level reflects effective cost-control measures. Though costs have been rising since the past few quarters, the company remains highly efficient compared with other large banks. The company’s efficiency ratio for the second quarter of 2015 came in at 52.6% as against 58% for JPMorgan and 55.2% for Citigroup.
• Higher Profitability: Wells Fargo surpasses other banks, including JPMorgan and Citigroup, in terms of profitability, thanks to its relatively lower costs and better asset quality. In the most recent quarter, the company reported return on assets of 1.35% as against 0.90% for JPMorgan and 0.73% for Citigroup. Moreover, return on equity was 13.78%, higher than JPMorgan’s 10.64% and Citigroup’s 6.6%.
• Expanding Operations: At a time when other financial players are shedding non-core businesses to lower cost and free up capital resources, Wells Fargo is further diversifying its operations. The company recently recruited over 50 new officials in its insurance division, to boost revenues and offset the pressure exerted on its lending business by prevalent low interest rates.
• Less Sensitive to Market Uncertainty: Thanks to a beta of 0.92, Wells Fargo is less sensitive to market risks compared with JPMorgan (beta of 1.22) and Citigroup (3.65).
• Higher Dividend Yield: Wells Fargo’s current annualized dividend yield stands at 2.91% compared with 2.86% for JPMorgan and a mere 0.40% for Citigroup.
Why Should You Bet on Wells Fargo Right Now
Earnings season is just round the corner and investing in a company that is likely to beat earnings expectations can be a wise decision. This is because a stock generally surges upon an earnings beat. Our proven model conclusively shows that Wells Fargo will likely beat the Zacks Consensus Estimate in its upcoming release. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy) or at least 2 (Buy) or 3 (Hold) for this to happen.
Fortunately, Wells Fargo fulfills both these criteria. It currently holds a Zacks Rank #2 and has an Earnings ESP of +3.81%. The company is expected to report third-quarter results on Oct 14.
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