I originally alerted readers of the Sax Angle to a profitable trading opportunity on Wells Fargo stock. See Two new insider buys today piqued my interest for the details of that post. Since then we have nearly doubled our money on two options we purchased, the June 30 calls and the May 30 calls. Both options looked cheap and after today’s move in Wells Fargo, they look even cheaper. What we mean by that although the options are nearly twice the price, the chart of Wells Fargo is far more bullish than it was when we first invested. Needless to say, we did not sell and actually are buying more. We first noticed Wells Fargo after the new CFO picked up 10,000 shares following its recent earnings report. When we bought it the stock was oversold and the technical picture hadn’t set up so well. It now looks much stronger.
1. Chart- The chart looks good to me. WFC is showing positive divergence on the Wilder’s Relative Strength index. Although price is heading south, the RSI line has turned up. Divergence is one of the few technical indicators that interest me. The stock pierced the 200 day moving average long enough to shake out some holders, and is now bouncing along the average but above it. There is no real resistance until it hits the 50 day moving average which coincidentally is along the support trend line if you draw a straight line along recent lows before it broke support. In other words, overhead resistance is now around $31.13. I give the technicals a plus 1
2. Analysts- there are 6 strong buys, 14 buys, 9 holds, 1 underperform, and 1 sell WFC recently downgraded by influential bank analysts Dick Bove and Citigroup. I dont’ put a whole lot of weight on analysts opinions. One thing for sure if all analysts like a stock, it’s the kiss of death. Who is left to buy it if everyone already owns it? Analyst research reports are great in helping you understand and short cut the 10k reading. They dont’ substitute for reading the charts. I’m neutral so the score is 0.
3. Insiders- recent 1ok purchase by the CFO gives it a plus 1
4.Management Discussion and 1ok – this is the only truthful thing you will read about a company. It’s composed by management, the auditors, and the firm’s lawyers. If all three of them can agree on the verbiage, it’s passed a big hurdle. Read it carefully. Pay particular attention to the Risks, Litigation, and Related Transaction sections. These are the things you will wish you had taken the time to read if something goes bad with your investment. Well Fargo has the imprimatur of Warren Buffett and that’s good enough for me. Besides anyone that has tried to get a home mortgage from Wells, knows they were the most conservative of all the major lenders. Give them a plus 1.
5.Market direction- what’s your time period? Mine is a week or two. I give the market a -1.
6. Sector outlook- Financials have been the worst performing ETF this year. But today, 5-3-11, the sector was the best performing. I give it a 1 since my time frame is short.
7. Cash flow- cash flow is more accurate than earnings. Earnings can be more easily manipulated. In the case of bank earnings, neither are very revealing. It’s all about charge offs and marks. Do you believe them or not? I give this a 0.
8. Peg ratio- To have a PEG ratio you have to know what earnings are and I don’t have much confidence in bank earnings right now as it’s too hard to tell what real estate is worth at the moment. I have to believe though we are well into the great real estate shakeout probably the 7th inning or so. My gut tells me WFC is growing faster than earnings. After all who’s left to bank with? I give them a plus 1.
9. Valuation- I don’t know how to evaluate WFC right now. I just assume that’s its on the low end of its price action and the real economy is definitely getting better. How can WFC not participate in the real economy. I give it +1
10. Catalyst I can think of the bad catalysts. The market seems to have priced in a few as this is the worst performing sector. Maybe WFC will get a break on credit card fees. At any rate, I think any catalyst would be viewed very positively. I have to believe the surprises could be on the upside. Give it a 0
Final Count is 6. Wells Fargo is a solid technical short-term buy but I would need a higher rating to be a long-term investor but adept traders should make good money buying the stock and super aggressive returns of 100-200% on the May and June 30 calls are 70% probable. Wells should reach $31.13 before the end of May expiration in the absence of unexpected geo-political events.
For further reading check out this article from Guru Focus
Warren Buffett’s love of Wells Fargo (WFC) is no secret. It’s the second largest holding in Berkshire Hathaway and one of the few that has seen its stake grow of late (when the stock was selling at much lower prices). Buffett had said he could see himself owning the stock for the next 5-10 years. He regularly comments that he only invests in companies where he can project the economics of the industry 10 years out. The economics of the banking industry has changed dramatically in the past couple years. One of the points Buffett mentioned in this weekends’ shareholder conference was that banks have deleveraged significantly, and this will put downward pressure on profitability. Another element of change is the consolidation of the banks. Several large banks have either gone under or been acquired by more robust banks. This naturally favors the remaining banks as it produces a much less competitive environment. Because of this consolidation the top 4-5 banks have grown their share of total deposits to about 40%.
The charts below from Mortgagedaily.com show the dramatic change in the mortgage market. Though they don’t provide hard numbers, it clearly shows Wells Fargo and Bank of America have jumped ahead.