We believe that Wells Fargo stock (NYSE: WFC) has an upside potential of 65% over a period of 1-2 years, as the loan repayment capacity of its banking customers improves. WFC trades at $22 currently and it has lost 58% in value year-to-date. It traded at a pre-Covid high of $46 in February and is 53% below that level now. Also, WFC stock has lost 12% from the $25 level seen in March 2020, despite the multi-billion dollar stimulus package announced by the U.S. government which has helped the stock market recover to a large extent. That said, the stock is lagging behind the broader markets by a margin (S&P 500 is up about 50%), as investor sentiment is negative due to poor Q3 results – revenues down by 14% y-o-y, and Wells Fargo’s limitation to handle loan defaults and extend credit lines as compared to its peers due to Fed Asset restrictions. However, the Fed’s asset growth restriction should be removed soon, and all banks are expected to resume share repurchases in FY 2021, helping the stock price in the near future. Our conclusion is based on our detailed analysis of Wells Fargo’s stock performance during the current crisis with that during the 2008 recession in an interactive dashboard analysis.
2020 Coronavirus Crisis
- 12/12/2019: Coronavirus cases first reported in China
- 1/31/2020: WHO declares a global health emergency.
- 2/19/2020: Signs of effective containment in China and hopes of monetary easing by major central banks helps S&P 500 reach a record high
- 3/23/2020: S&P 500 drops 34% from the peak level seen on Feb 19, as Covid-19 cases accelerate outside China. Doesn’t help that oil prices crash in mid-March amid Saudi-led price war
- From 3/24/2020: S&P 500 recovers 52% from the lows seen on Mar 23, as the Fed’s multi-billion dollar stimulus package suppresses near-term survival anxiety and infuses liquidity into the system.
In contrast, here’s how WFC and the broader market performed during the 2007/2008 crisis.
Timeline of 2007-08 Crisis
- 10/1/2007: Approximate pre-crisis peak in the S&P 500 index
- 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
- 3/1/2009: Approximate bottoming out of the S&P 500 index
- 1/1/2010: Initial recovery to levels before the accelerated decline (around 9/1/2008)
Wells Fargo vs S&P 500 Performance Over 2007-08 Financial Crisis
WFC stock declined from levels of around $25 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 higher 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 124% between March 2009 and January 2010. In comparison, the S&P bounced back by about 48% over the same period.
Wells Fargo’s Fundamentals in Recent Years Look Strong
Wells Fargo revenues saw a drop of -1% from $86.1 billion in 2015 to $85.1 billion in 2019, mainly driven by negative growth in the community banking segment. Further, the company’s net income decreased from $21.6 billion to $17.9 billion, resulting in an EPS decline from $4.21 in 2015 to $4.08 in 2019. Further, the company’s Q2 2020 revenues were 17% below the year-ago period, and the EPS figure for the quarter decreased from $1.31 in Q2 2019 to -$0.66 in Q2 2020, mainly driven by a sharp increase in provision for credit losses.
Phases of Covid-19 crisis:
- Early- to mid-March 2020: Fear of the coronavirus outbreak spreading rapidly translates into reality, with the number of cases accelerating globally
- Late-March 2020 onward: Social distancing measures + lockdowns
- April 2020: Fed stimulus suppresses near-term survival anxiety
- May-June 2020: Recovery of demand, with the gradual lifting of lockdowns – no panic anymore despite a steady increase in the number of cases
- July-October 2020: Poor Q2 results and lukewarm Q3 expectations, but continued improvement in demand, a decline in the number of new cases, and progress with vaccine development buoy market sentiment
Keeping in mind the trajectory over 2009-10 and in view of the improvement in Wells Fargo’s stock since late March, this suggests a potential recovery to around $36 (66% upside) once economic conditions begin to show signs of improving. This marks a partial recovery to the $46 level Wells Fargo’s stock was at before the coronavirus outbreak gained global momentum.
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