Last week, the President and CEO of Wells Fargo & Company (NYSE: WFC), Tim Sloan, stated that he spoke to the legendary investor Warren Buffett, the largest shareholder with a 10% stake, and reassured him that the bank is on a right track, following the fake accounts scandal that tarnished the reputation. Since the scandal broke out on September 8th, the stock has appreciated by about 18% so far. Yesterday, the stock closed at $57.60. Despite the assurance given by Sloan, we anticipate a correction in the stock due to the reasons provided below.
The 4Q16 revenue and earnings of Wells Fargo, reported in January 2016, were pretty ordinary, and lower than the corresponding period last year. Thus, it can be inferred that the stock appreciated mainly due to the overall rally in the banking stocks. In the wake of the scandal that sent jitters among investors, the former CEO John Stumpf forfeited his unvested equity awards worth $41 million. However, Stumpf exercised his stock options and walked away with $84 million. He also owns 2.5 million shares worth $147 million on the basis of last Friday’s close of $58.67. The investors would be quite concerned by the manner in which failed executives were paid by the bank, and it is expected to reflect in the annual meeting scheduled next week.
To soothe investors, the CEO has plans to increase the shareholder’s dividend by reducing the CET1 (Common Equity Tier 1) ratio of the bank to about 10%, from the current 10.7%. However, legally, the issue is far from over. The Democrats have accused the bank of stonewalling the investigation of the fake accounts. Maxine Waters, one of the senior members of the House Financial Services Committee, wrote a letter to Sloan expressing her disappointment over the lack of co-operation from the bank for the probe. This reflects the political risks faced by Wells Fargo. CEO Sloan opined that it would take several more months to settle the fake accounts scandal permanently. In recent months, the bank has seen nearly a 44% decline in the new accounts opened by customers. Thus, fundamentally, profit booking can be expected at these levels.
Technically, the stochastic oscillator has formed a negative divergence with the price. The chart also indicates strong resistance for the stock at $59 levels. Thus, a decline in the share price can be expected by a trader.
To gain from the prediction, a trader can invest in a put option that expires at the end of March. It would be wise to enter the trade when the stock of Wells Fargo trades near $58 on the stock exchange.
Disclaimer: Any financial trading analysis offered here is our opinion and is not intended as advice or direction for investors. We cannot guarantee the success of any trades made as a consequence of this article, and we encourage traders to incorporate a strong money management strategy to limit losses when they enter the markets. Please use this article as part of your own research before formulating strategies prior to trading.
