What's Happening
Wells Fargo ( WFC ) has recently come under fire in response to fraud concerns, but the company will get a chance to bring some enthusiasm back into the stock when it reports its third-quarter numbers on October 14. The company will report ahead of the market open, with the consensus calling for earnings of $1.02 per share. With the recent selloff, WFC shares are currently down 16.9% on the year.
Technical Analysis
WFC was recently trading at $45.22, down $11.12 from its 12-month high and just $1.67 above its 12-month low. Overall technical indicators for WFC are bearish, and the stock is in a strong downward trend. The stock has recent support above $43.50, and has recent resistance below $46.50. Of the 25 analysts who cover the stock, 12 rate it a "strong buy", three rate it a "buy", six rate it a "hold", and four rate it a "strong sell". The stock receives S&P Capital IQ's 4 STARS "Buy" ranking.
Analyst's Thoughts
Wells Fargo will get a chance to bring some enthusiasm back into the stock with its upcoming quarterly report. With so much negativity surrounding the stock in the heels of the recent fraud revelations, it is hard to imagine seeing too much upside, even if results are sharply higher than forecast. Wall Street expects earnings of $1.02, which would translate to a 2.8% year over year decline. After it came to light that over 5,000 Wells Fargo employees opened more than a million fake accounts for customers, Wall Street punished the stock and questioned how such practices could have occurred for so long without going noticed. The company has admitted to firing around 1,000 a year over the time period in question, so it was obvious that management did have knowledge that opening fake accounts under customers names was taking place. It is hard to say if Wall Street will look past the fraud issues if the company posts solid numbers, but with a P/E of just 11.1, the worst is probably behind the stock at this point. The quarterly report may give the stock a small boost, but I see limited upside in shares until the current scandal stops dominating headlines.
Stock Only Trade
I would not look to purchase the stock at this time, as I would prefer to hedge any bets I made on WFC while the fraud scandal remains in the headlines.Bullish Trade
If you want a bullish hedged trade on the stock, consider a December 34/39 bull-put credit spread for a 25-cent credit. That's a potential 5.3% return (27.4% annualized*) and the stock would have to fall 13.2% to cause a problem.
Bearish Trade
If you want to take a bearish stance on WFC at this time, consider a December 48/50 bear-call credit spread for a 30-cent credit. That's a potential 17.6% return (92.0% annualized*) and the stock would have to rise 6.9% to cause a problem.
Covered Call Trade
If you like the stock, but wish to lower your cost basis on a new position, you may want to consider a January $45.00 covered call. Buy WFC shares (typically 100 shares, scale as appropriate), while selling the January $45.00 call for a debit of $43.10 per share. The trade has a target assigned return of 4.3%, and a target annualized return of 15.2% (for comparison purposes only).The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
Originally published on InvestorsObserver.com
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
