Why Wells Fargo Stock Is Headed Higher

Bank stocks are turning in another good performance today following a rise in mortgage rates and a slight improvement in pending home sales last month. While the biggest beneficiary of these trends is undoubtedly Wells Fargo (NYSE: WFC  ) , given its complete domination of the home-lending market, the majority of its competitors are following suit, pushing the KBW Bank Index (DJINDICES: ^BKX  ) higher by 1.6% at the time of writing.

Earlier today, the National Association of Realtors released its estimate of pending home sales for the month of April. Its index showed that the number of signed real estate contracts for existing single-family homes nudged higher last month by 0.3% compared to March. On a year-over-year basis, meanwhile, the figure shot up by 10.3%.

"The housing market continues to squeak out gains from already very positive conditions," said Lawrence Yun, NAR's chief economist. Yun went on to predict that "total existing home sales are expected to rise just over 7% to about 5 million this year."

This trend should come as no surprise if you've been following the news. We learned last week that new and existing-home sales grew in April by 29% and 10%, respectively, compared to the same month in 2012 -- to read more about this, click here. At the same time, moreover, home prices have been slowly gaining momentum while mortgage delinquencies and underwater loans are on the decline.

Suffice it to say, this is music to Wells Fargo's ears, given that it underwrites roughly a third of the nation's mortgages. And making the tune even sweeter is the fact that mortgage rates are beginning to creep back up since the Federal Reserve implemented its third round of quantitative easing -- which, not incidentally, is aimed at driving down long-term interest rates.

As you can see in the chart above, according to Freddie Mac, the rate on a 30-year fixed-rate conventional mortgage came in at 3.81% this week, an increase of 22 basis points from the prior week's 3.59%. While higher rates lower the value of mortgage-backed securities, they push up the net interest margin of lenders that retain mortgages on their balance sheets as opposed to selling them off to private investors or one of the government-sponsored entities. And because Wells Fargo has a recent history of doing more of this than its peers, it could very well be in a position to benefit accordingly.

Does this mean that Wells Fargo is a buy? Maybe. Maybe not. As a general rule, I'm a proponent of passively managed index funds such as the SPDR S&P 500 or the SPDR S&P Dividend ETF. That being said, if you were inclined to buy a bank stock, there are few that are better than Wells Fargo.

Want to learn more about Wells Fargo?
Wells Fargo's dedication to solid, conservative banking helped it vastly outperform its peers during the financial meltdown. Today, Wells is the same great bank as ever, but with its stock trading at a premium to the rest of the industry, is there still room to buy, or is it time to cash in your gains? To help figure out whether Wells Fargo is a buy today, I invite you to download our premium research report from one of The Motley Fool's top banking analysts. Click here now for instant access to this in-depth take on Wells Fargo.


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