It has been a tough year for Wells Fargo (NYSE:WFC), as the bank seeks to repair its tarnished image in the wake of a sales scandal disclosed by the Consumer Financial Protection Bureau last year. But in the stock market, one company's challenges can be an investor's opportunity.
Given the lagging performance of Wells Fargo stock over the past year, this raises the question: Is Wells Fargo stock a buy in November?
The bull case for Wells Fargo stock
At least initially, it seems that the answer to this is yes. I say that because shares of Wells Fargo have underperformed most other big bank stocks over the recent past.
Since the beginning of the year, shares of the nation's third-biggest bank by assets have climbed 1.8%. That isn't horrible, but it's far from good when you consider that the KBW Bank Index, which tracks shares of two dozen large-cap banks, is up 11% over the same stretch.
The comparison looks even worse if you look at the performance of Wells Fargo's stock over the past 12 months. Since this time last year, its shares are up 22% compared to a gain of 37% for the average bank on the KBW Bank Index. The cost of Wells Fargo's scandal, in other words, isn't that its stock has fallen, but rather that it hasn't kept pace with the rest of the industry.
All of this has weighed on Wells Fargo's stock valuation. The bank currently trades for 14.6 times its expected earnings per share over the next 12 months. That's comfortably below the average big bank, which trades for closer to 17 times forward earnings. Given this, one would be excused for concluding that Wells Fargo stock is indeed a good buy right now.
The bear case for Wells Fargo stock
While there are reasons to think that Wells Fargo's shares are attractively priced right now, there are also factors that go against an investment in the California-based bank.
In the first place, one could argue that the bank's response to the crisis has fundamentally altered the traditional investment thesis in its stock. Wells Fargo was known for years as having one of the highest cross-sale ratios in the industry, with an average retail customer using 6.1 of the bank's products and services as of last year, which has long been much higher than the typical bank.
Wells Fargo accomplished this by putting immense pressure on employees in its branches to open new accounts for customers. But as the bank itself has acknowledged, it was this pressure that led thousands of its employees to open millions of accounts for customers without customers' authorization. Consequently, the bank has abandoned its former focus on sales, which will impair the bank's growth and profitability.
On top of this, Wells Fargo has seen multiple large customers blacklist the bank. In the middle of last month, the bank's home state of California extended a ban on using Wells Fargo to underwrite municipal bonds. All told, moves like these have cost the bank "tens of millions of dollars" in revenue, according to its chief financial officer.
Finally, most of Wells Fargo's fundamental performance metrics have been heading in the wrong direction and continue to do so. In the latest quarter, the notoriously efficient bank spent 65.5% of its revenue on operating expenses compared to only 59.4% in the same quarter last year. The net result is that Wells Fargo's profitability has dropped considerably, with its earnings per share in the third quarter falling by 20%.
In sum, while there are reasons to be optimistic about Wells Fargo's stock at its current valuation, before concluding that it's a buy in November, investors should think long and hard about whether the onetime industry darling will be able to reclaim its former glory.