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Bear Of The Day: Wells Fargo (WFC)

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Wells Fargo (WFC - Free Report) has been through the wringer over the last 2 and a half years, with their name consistently in news headlines associated with scandals and fraudulent activity. The company has had to pay substantial sums of money in lawsuits and penalties, taking a hit on the firm’s bottom line. The company was engaged in activities ranging from creating false accounts to overcharging small businesses with deceptive tactics and even improperly repossessing service members’ cars.

The Federal Reserve final said enough was enough and restricted Wells Fargo’s growth with an asset cap in February of 2018 “responding to widespread consumer abuses and compliance breakdowns.”  The firm is under this restriction “until it sufficiently improves its governance and controls.

Wells Fargo has had to shut down 100s of branches and cut over 26,000 jobs in the past 2 years. WFC has far underperformed the already underperforming banking industry. As you can see below, WFC has lost 16.6% for investors in the past 52-weeks, below the overall banking industry, which itself is far underperforming the market.

WFC would be down significantly more if it weren’t for the massive stock repurchases they have been executing recently. They bought back $21 billion of their own stock in 2018, more than any of the other big banks. WFC only did this in order to reignite interest and curb some of the impact these scandals had on its stock price. This was a very inefficient use of funds, and I would venture to say this deteriorated shareholder long-term value.

All these scandals, and even the massive amounts of stock repurchases we have seen from WFC are likely caused by managements pay structure. Executives at Wells Fargo are paid primarily in stock compensation, which can cause management to make poor long-term business decisions for short-term stock price gains. This can pay structure can and has created serious systemic issues with WFC.

Interest Rates

The Federal Reserve has been very dovish over the past 6 months or so, which is a 180 pivot from their tightening mentality they've had in the recent past, raising rates 8 times in the past 2 years. The Fed is even considering a rate cut in the near future if the economy starts to show signs of weakness. This is bad news for banks like Wells Fargo considering most of their income is derived from interest rate income. When interest rate cuts are expected in the future, the asset capped WFC will be expected to see a diminishing topline.

Conclusion

Wells Fargo is expected to have negative revenue growth for the next two years. Sell-side analysts have lowered EPS estimates, not only in the next two quarters but for 2019 and 2020. The stock is sitting at a Zacks Rank #5 (Strong Sell).

 

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