Wells Fargo’s Stock Is Expensive: Could It Still Be a Big Buy?



Analysts expect upside

First-quarter earnings for the entire financial sector are expected to be dull, but analysts expect Wells Fargo (WFC) to be hit far less hard than its peers.

Further, the company’s stock has currently priced in the risk of defaults from its energy-related loans as well as the perceived weakness in the US economy. With these fears easing, WFC’s stock is expected to get a boost. Analysts see it as a good value buy at its current levels.

In 2016 so far, shares of Wells Fargo have underperformed the financial sector. The Financial Select Sector SPDR ETF (XLF) represents the financial sector. Year-to-date, it has fallen 7.5%. In comparison, Wells Fargo has fallen 15%.

On April 7, 2016, WFC closed at $46.93. With an average consensus price target of $55.51, it’s expected to rise 18% in the next 12 months.

Among the 38 analysts following the stock, 24 have assigned “buy” ratings, ten have assigned “hold” ratings, and four have assigned “sell” ratings to Wells Fargo. If the company’s earnings beat analysts’ expectations, we could see some of these “hold” ratings converted into “buys.”

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Banks use mark-to-market accounting, so their book values are a good indicator of their asset values. Thus, banking stocks are generally valued on the basis of their book values.

Wells Fargo’s book value has grown to twice that of JPMorgan Chase (JPM) and ten times that of Bank of America (BAC) in the past ten years. WFC has been one of the most profitable banks in America, generating a 1.3% return on assets last year. It relies less on investment banking and trading activities, making it less risky in current conditions. An interest rate hike could act as a positive catalyst to its earnings.

Shares of the company are trading at a price-to-book multiple of 1.5x, making it valuable compared to peers JPMorgan Chase, Citigroup, and Bank of America.


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