Intelligence

Wells Fargo (WFC)

By septembre 29, 2016 No Comments

In today’s content analysis we discuss a delicate subject: the Wells Fargo & Co. (WFC) scandal. Wells Fargo, one of the biggest banks of the United States and in the world, has been accused of illegal sales practices which include opening 2 million fake accounts, and among other allegations, employees allegedly created fake email addresses to enroll consumers without their consent or people who don’t exist in online-banking services, just to hit their sales quotas. Wells Fargo neither admitted nor denied the allegations but agreed to pay the fine and to submit a consent order. This ultimately lead to 5,300 fired employees and USD $185 million in fines, for now.

Since the market open of Monday, September 20, the day on which the scandal reached a fever pitch, WFC lost about 2.1%, while the Dow Jones US Financials Index return is close to 0%. This tells us investors haven’t totally lost confidence in the company, but are a little cautious. When a company is surrounded with this type of scandal, it is important for investors to be able to assess the risk-return ratio. Even though many external and unpredictable news can have an impact on the stock in the next few days, positively or negatively, here are a few observations fully based on historical data analytics.

Since nothing changed in WFC’s financial statements for now, its SPscore is still high at 69%. And from what we see for now in the publicly available information, the fundamental data should not be significantly affected. The intrinsic value curve has been growing steadily in the past years, and following WFC’s stock price drop since early September, it is now positioned above the stock, around 54$. The gap between the intrinsic value and the price is widening, and now reflects a 20% upside potential. This gap is even more interesting when considering the 5-year average P/IV is of 1.02 (2% premium). The future growth value (FGV) also points in that direction. The current FGV is at -1.7% (discount), way below the 5-year average of 14% (premium). 

For those able to tolerate the short term risk & volatility and who believe the bank’s long term reputation won’t be affected by this scandal, starting to build a position now would mathematically make sense. However, if mitigating the short term risk is a priority, waiting for the scandal’s definite outcome and buying the stock only once it starts recovering is a better option, even if this probably implies missing the initial spike.

This newsletter was written by Sebastian Carrillo, McGill Intern, under the supervision of Jean-Didier Lapointe.