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Price Action Thesis
In this article, we discuss our price action analysis on Wells Fargo (NYSE:WFC) stock. The bank fared well in the Fed’s recent stress test, even as its stock was hammered since a massive bull trap (significant rejection of buying momentum) in February 2022. However, WFC has been de-rated in line with its financial peers, as the market prognosticated a potential recessionary scenario.
Our price action analysis suggests a near-term bottom, undergirded by its near-term support. Notwithstanding, a double bottom bear trap remains elusive, which is instrumental in helping stanch its bearish bias.
Given its considerable exposure to the mortgage market, we believe the market’s de-rating of WFC is justified. However, the consensus estimates remain constructive, modeling for a transitory economic slowdown, but not a deep and extended one.
As such, we rate WFC as a Technical Buy with a near-term price target (PT) of $44, implying a potential upside of 9.2% (at writing).
However, investors are reminded that we have not observed a double bottom bear trap. Also, the consensus estimates could be revised significantly downwards if a recessionary scenario is expected to occur, impacting its valuation.
WFC: Two Massive Bull Traps Killed Its Bullish Flow
WFC price chart (TradingView)
WFC had a remarkable, bullish bias from late 2020 that sustained its upward momentum until its first significant bull trap in February 2022. Therefore, the market has set up its reversal to bearish flow since the start of the year, as it anticipated a higher level of macro stresses ahead.
Notably, WFC formed a validated bear trap in early March. But, such a bear trap after a massive bull trap is often unreliable. Furthermore, another noteworthy bull trap in late March created a lower-high price structure. As a result, the warning signs of a steeper sell-off were brewing in February/March.
Not surprisingly, its early March bear trap was quickly invalidated by rapid liquidation in WFC positions, as the market then formed another lower-high bull trap in late May. As a result, we are confident that WFC has lost its bullish bias unless it can create a double bottom and subsequently retake its near-term resistance ($46) convincingly.
Still, we believe it’s at a near-term bottom but not supported by a bear trap. As a result, we would not consider holding WFC for the medium term until it regains its bullish bias. However, a near-term technical opportunity to add WFC is still possible with a tight PT.
The Street Expects Wells Fargo To Skirt A Recession
Wells Fargo adjusted EPS change % and adjusted net margins % consensus estimates (S&P Cap IQ)
As seen above, the consensus estimates indicate that FY22 will likely be a transitory blip in its adjusted net margins. The Street expects Wells Fargo to post an adjusted net margin of 21.2% in FY22 before recovering to 24% in FY23. Furthermore, its adjusted EPS growth is also projected to bottom in FY22 (-15.5%) before resuming its recovery in FY23.
Hence, we believe a protracted slowdown leading to a deeper recession remains the most significant risk to Wells Fargo’s bullish thesis.
WFC NTM normalized P/E (TIKR)
Notwithstanding, we observed that the market has already priced in such a marked slowdown as it last traded at an NTM normalized P/E of 9.12x (Vs. 5Y mean of 12.69x). However, it remains well above its COVID bottom of 6.65x.
Notwithstanding, investors should not immediately assume that the market is not pricing WFC lower. As presented in our price action analysis, we posited that WFC remains in a bearish flow. However, the market often uses short-term rallies to draw in dip buyers before forcing a steeper sell-off when a stock is in bearish momentum.
Therefore, unless a significant bear trap shows itself, investors should continue to add exposure carefully, respecting the market’s dominant bearish bias until a significant bear trap appears. Also, if another lower-high bull trap forms, it could likely indicate an early signal preceding a rapid liquidation move to take out a lower low in WFC.
Is WFC Stock A Buy, Sell, Or Hold?
We rate WFC as a Technical Buy, with a near-term PT of $44. It implies a potential upside of 9.2% at writing (Vs. 5Y total returns CAGR of -2.13%).
However, we suggest investors use appropriate risk management strategies to protect their positions if they choose to add, given a lack of bear trap price action.
Our thesis also depends on the market’s outlook for a recessionary scenario. The market’s outlook remains bearish in financial stocks until a bear trap is formed. As such, it could impact our near-term thesis on WFC.
