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Wells Fargo Stock Very Well May Be the GE of the Banking Sector

Will Healy

Wells Fargo (NYSE:WFC) fell on Friday following the company’s earnings release. The company reported higher revenues and earnings than analysts had predicted. However, lowered guidance sent the stock tumbling, and analyst downgrades of WFC stock followed.

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Almost three years after news of its scandal broke, concerns about Wells Fargo stock have persisted. Continued revelations may have led to the sudden resignation of Tim Sloan, and now the company must find a CEO who can turn the company around.

This places a cloud over WFC, and until the company can show that it has reformed itself, average investors should probably avoid this equity.

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Lowered Guidance and WFC stock

At first glance, WFC stock may look like a buying opportunity. The forward price-to-earnings (PE) ratio has fallen to about 8.3. Analysts also foresee double-digit profit growth both this year and in the foreseeable future. WFC stock even opened trading higher on Friday following the company’s better-than-expected revenue and earnings.

However, the equity quickly reversed course when the bank lowered the outlook on its net interest income. CFO John Shrewsberry said net interest income would fall between 2% and 5% from last year’s levels. Previous guidance set a range between -2% and an increase of 2%. Shrewsberry credited an unfavorable environment for rates as well as increased competition for the decline.

With the flattening yield curve, one can argue that interest income would fall anyway. However, the report reinforces the reputation damage the company suffered from the fake accounts scandal of 2016. Revelations of scandal have continued as the bank later admitted to modifying mortgages without customer approval and charging for unneeded car insurance.

Analyst Downgrades and Wells Fargo Stock

Last year, Senator Elizabeth Warren called for the firing of CEO Tim Sloan. Despite Sloan unexpectedly resigning in March, analysts continue to turn on the stock. Firms such as BofA Securities, a division of Bank of America (NYSE:BAC), and Goldman Sachs (NYSE:GS) downgraded Wells Fargo. Buckingham Research Group followed suit as their analyst referred to WFC as “dead money.”

Even Warren Buffett has sent mixed signals. Buffett once regarded WFC as his favorite stock and continues to voice support for the company. Last year, he predicted WFC would be worth “a great deal more” in ten years. He even expressed confidence in Sloan hours before he resigned.

However, Buffett has reduced his stake in WFC stock in every quarter since Q2 2017. Buffett’s Berkshire Hathaway (NYSE:BRK.A, NYSE:BRK.B) once owned more than 506 million shares. More recently, the Berkshire portfolio held just over 426.7 million shares as of the last quarterly statement.

The GE of Banking Stocks?

In fairness, reasons besides loss of confidence in WFC stock could explain Buffett’s stock sales. Still, unloading millions of shares every quarter does not imply confidence. Also, the continuing revelation of new scandals leaves even bottom fishers questioning whether a scandal suggests a buying opportunity for Wells Fargo stock or a genuine long-term threat. In some respects, this makes WFC look like GE (NYSE:GE), a stock that fell to single-digit levels on a slow trickle of bad news.

As with GE, the periodic revelations undermined confidence in the company and may have shortened the tenure of the previous CEO. Now, investors need a leadership team who can truly come clean and address the scandals that have plagued the stock over the last three years. Until investors can have a reasonable assurance that Wells Fargo has fixed itself, they cannot build confidence in Wells Fargo stock.

The Bottom Line on Wells Fargo Stock

The previous quarterly report shows that questions about WFC stock persist. WFC fell on lowered guidance. However, with the short tenure of former CEO Tim Sloan, the company still faces challenges in recovering from scandals that began to come to light in 2016. Analysts continue to downgrade the equity, and Warren Buffett’s words and actions toward Wells Fargo stock continue to send mixed signals.

This news has repelled investors who might otherwise buy on WFC’s single-digit PE and double-digit profit growth. The slow trickle of new revelations seems to resemble the reputation issues facing GE. Like with GE, Wells Fargo needs to show investors that the company has leveled with the public and has committed itself to reform.

On paper, Wells Fargo looks like a low-priced equity. Its current challenges could even lead to an eventual buying opportunity. However, until management can inspire such a belief in itself, WFC stock will probably struggle to sustain a move higher.

As of this writing, Will Healy is long BRK.B stock. You can follow Will on Twitter at @HealyWriting.

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