The Wells Fargo Sell-Off Is Overdone: Buy Buy Buy!

The news on Wells Fargo & Co (WFC) has been nothing but negative since the sales scandal was revealed. While the immediate financial hit ($185 million) is pocket change for Wells Fargo, qualitative factors are driving the stock down.

The shares have fallen 11% since the news of the scandal broke. Neither the exit of long-time CEO John Stumpf (without a golden parachute) nor good quarterly earnings have had a positive impact.

The negative bias is not without reason of course.

Since the scandal broke, U.S. states and public investment funds have sought to end business ties with Wells Fargo, at least temporarily.

For example, Ohio state Governor John Kasich announced he is barring Wells Fargo (for one year) from "participating in future state debt offerings and financial services contracts initiated by state agencies under his authority," and will seek to exclude it from debt offerings initiated by the Ohio Public Facilities Commission.

A single action such as this will not make a material, dent but the fear here is of contagion (i.e. that others may follow Ohio's lead and the cumulative effect will be very negative for earnings).

This does not even begin to consider the effect the scandal might have on choices made by retail customers which are Wells Fargo's bread and butter.
The Wells Fargo Sell-Off Is Overdone: Buy Buy Buy!
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Repairing that damage will take years. To quote Wells Fargo's largest shareholder Warren Buffet, "It takes 20 years to build a reputation and five minutes to ruin it."

Considering all the negativity and challenges Wells Fargo is likely to face, why should you buy the bank now? The chart below shows no reason to step in at this time. It's on a decidedly negative trajectory and well below the 200-day moving average.

Wells Fargo Stock Price

However, there are 3 reasons I think investors ought to consider buying the stock now.

In summary, we have lots of qualitative reasons to stay away from WFC. But, knowing that the dividend is safe, that the current valuation is below what is fair value, and that the growth assumed by the market is comparable only to a period of time where the industry looked set to collapse, I believe that WFC presents a very appealing investment opportunity at this time.
Published on Oct 17, 2016
By Gautam Lamba

Copyrighted 2020. Content published with author's permission.

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