Price Action Thesis
In this article, we discuss our analysis of the price action on Wells Fargo (NYSE: WFC) Inventory. The bank did well in the recent Fed stress test, even though its stock was hammered since a massive bullish trap (significant rejection of buying momentum) in February 2022. However, WFC was downgraded in line with its financial peers as the market was pricing in a potential recession scenario.
Our analysis of the price action suggests a short-term bottom, backed by its short-term support. Nonetheless, a double-bottom bear trap remains elusive, which helps mitigate its bearish bias.
Given its significant exposure to the mortgage market, we believe the market’s downgrade of WFC is warranted. However, consensus estimates remain constructive, modeling a transitory, but not deep and prolonged, economic downturn.
As such, we rate WFC as a technical buy with a short-term (PT) price target of $44, implying a potential upside of 9.2% (at the time of writing).
However, investors are reminded that we have not observed a double bottom bearish trap. Moreover, consensus estimates could be revised significantly downwards if a recessionary scenario were to occur, impacting its valuation.
WFC: Two massive bull traps killed its bullish flow
The WFC had a remarkable bullish bias from the end of 2020 which maintained its bullish momentum until its first significant bullish trap in February 2022. Consequently, the market set up its reversal to bearish flow from the beginning of the year, as he anticipated a higher level. future macro-stress.
Notably, WFC formed a validated bear trap in early March. But, such a bear trap after huge bull trap is often unreliable. Additionally, another notable upside trap in late March created a lower price structure. As a result, the harbingers of deeper selling emerged in February/March.
Unsurprisingly, his early March bear trap was quickly invalidated by a rapid liquidation of WFC positions, with the market then forming another bullish low-high trap in late May. As a result, we are confident that the WFC has lost its bullish bias unless it can create a double bottom and then retake its near-term resistance ($46) convincingly.
Still, we believe it is at a near-term bottom but not supported by a bear trap. Therefore, we would not consider holding the WFC over the medium term until it regains its bullish bias. However, a short-term technical opportunity to add WFC is still possible with a tight PT.
The street expects Wells Fargo to ride out a recession
As seen above, consensus estimates indicate that FY22 will likely be a transient anomaly 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. Additionally, its Adjusted EPS growth is also expected to bottom out in FY22 (-15.5%) before resuming its recovery in FY23.
Therefore, we believe that a prolonged downturn leading to a deeper recession remains the most significant risk to Wells Fargo’s bullish thesis.
Nonetheless, we observed that the market has already priced in such a sharp downturn as it last traded at an NTM normalized P/E of 9.12x (vs. a 5-year average of 12.69x). However, it remains well above its COVID floor of 6.65x.
Nonetheless, investors should not immediately assume that the market is not pricing WFC down. As presented in our analysis of the price action, we have assumed that WFC remains in a bearish flow. However, the market often uses short-term rallies to entice bearish buyers before forcing a steeper selloff when a stock is in bearish momentum.
Therefore, unless a significant downside trap emerges, investors should continue to increase exposure cautiously, respecting the prevailing bearish bias of the market until a significant downside trap appears. Additionally, if another lower bullish trap forms, this could likely indicate an early signal preceding a quick sell-off move to clear a WFC low.
Is WFC stock a buy, sell or hold?
We rate WFC as a technical buy, with a short term PT of $44. This implies upside potential of 9.2% at writing (Vs. CAGR of 5-year total returns of -2.13%).
However, we suggest investors use appropriate risk management strategies to protect their positions if they choose to add, given the lack of downside trap price action.
Our thesis also depends on the market outlook for a recessionary scenario. The market outlook remains bearish in financial stocks until a downside trap forms. As such, this could impact our short-term thesis on the WFC.