Based on a comparison of Wells Fargo’s stock (NYSE: WFC) trajectory over recent months with that around the 2008 recession, we believe that the stock can potentially gain 50% once fears surrounding the coronavirus outbreak subside – scaling $36 from current levels of $24. A detailed comparison of Wells Fargo’s performance with the S&P 500 is available in our interactive dashboard analysis, 2007-08 vs. 2020 Crisis Comparison: How Did Wells Fargo Stock Fare Compared With S&P 500?
The World Health Organization (WHO) declared a global health emergency at the end of January in light of the coronavirus spread. The rally in the equity market continued till February 19, with the S&P 500 reaching a record high, but the trend reversed sharply over the following weeks. WFC stock lost 46% of its value (vs. about 34% decline in the S&P 500) between February 19 and March 23. A bulk of the decline came after March 6th, when an increasing number of Coronavirus cases outside China fueled concerns of a global economic slowdown. Notably, though, while the multi-billion dollar stimulus package announced by the U.S. government has helped the broader stock market recover 32% over recent weeks, WFC stock has shrunk slightly to its current level of $24.
Wells Fargo’s Stock Fell Considerably Because The Situation On The Ground Has Changed
Wells Fargo originates and services the largest number of mortgages in the country. It has a sizable loan portfolio of around $399 billion in community loans and $456 billion in commercial loans (as per 2019 data). On the other hand, we expect that businesses could suffer losses due to the combined effect of lower consumer demand, supply chain disruption, and global economic slowdown. This could impact the loan repayment capacity of both commercial and community banking customers, exposing the bank to the possibility of sizable losses. Further, as the economic condition deteriorates, it would become expensive for the bank to attract funding, negatively impacting all its operations.
We believe Wells Fargo’s Q2 results will confirm this reality with a sizable reduction in both community and commercial banking revenues. More information about Wells Fargo’s revenues and forecast for FY 2020-21 are available in our interactive dashboard. That said, we believe investors are overestimating the impact of a slowdown on Wells Fargo’s loan portfolio – very likely due to the sizable exposure to mortgages as well as oil & gas companies.
But Wells Fargo Stock Witnessed Something Similar During The 2008 Downturn
We see WFC stock declined from levels of around $26 in October 2007 (the pre-crisis peak) to roughly $9 in March 2009 (as the markets bottomed out) – implying that the stock lost as much as 65% of its value from its approximate pre-crisis peak. This marked a sharper drop than the broader S&P, which fell by about 51%.
However, WFC recovered strongly post the 2008 crisis to about $20 in early 2010 – rising by 125% between March 2009 and January 2010. In comparison, the S&P bounced back by about 48% over the same period.
Will Wells Fargo’s Stock Recover Similarly From The Current Crisis?
Keeping in mind the fact that WFC stock fell 46% from the market peak on February 19 to the low on March 23 compared to the 65% decline during the 2008 recession, we believe it can potentially recover by (50%) to levels of $36 once economic conditions begin to show signs of improving. This marks a partial recovery to the $46 level WFC stock was at before the coronavirus outbreak gained global momentum.
Notably, though, the actual recovery and its timing hinge on the broader containment of the coronavirus spread. Our dashboard forecasting U.S. COVID-19 cases with cross-country comparisons analyzes expected recovery time-frames and possible spread of the virus. Further, our dashboard -28% Coronavirus crash vs. 4 Historic crashes builds a complete macro picture and complements our analyses of the coronavirus outbreak’s impact on a diverse set of Wells Fargo’s multinational peers. The complete set of coronavirus impact and timing analyses is available here.