Wells Fargo (WFC +0.66%) has been one of the financial sector's worst performers in 2020. The stock is still down by 45% from where it started the year, dramatically lagging behind the S&P 500 and the financial sector as a whole.
Wells Fargo's poor performance isn't all pandemic-related. Thanks to its fake-accounts scandal and several other issues with its corporate culture, Wells Fargo has underperformed the Financial Select Sector SPDR ETF (XLF +0.48%) by a staggering 94 percentage points over the past five years.
I think that could all change starting in 2021.
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Wells Fargo could soar in a post-pandemic world
You can buy Wells Fargo for a discount to the value of its assets, and a big discount to its historical price-to-book multiple. To be sure, there are some good reasons for the stock's poor performance in recent years. Yet, there's also reason to believe Wells Fargo could be one of the best-performing bank stocks in a post-pandemic world. Here are several reasons I think that's exactly what will happen:
- Commercial banking focus: Wells Fargo's focus on commercial banking has been a major reason for its pandemic-era underperformance, but this could also be its best asset once the pandemic ends. Wells Fargo doesn't care if trading volume or IPO activity drops as the global economy normalizes. Such a normalization would likely lead to more demand for lending and fewer defaults.
- Buybacks: The Federal Reserve cleared Wells Fargo to resume buybacks in the first quarter. If the bank's recent history is any indication, it loves to be aggressive with buybacks when the stock is cheap.
- Dividends: Consumer banking activities and the need to set billions aside to cover loan losses forced Wells Fargo to cut its dividend by more than 80% in 2020. Although CEO Charles Scharf has said it might take some time to return to the previous dividend level, it most likely will within the next year or two. The prior dividend would translate to a yield of about 7%, which could be a big tailwind for the stock.
- Federal Reserve penalty: Wells Fargo is still subject to a Federal Reserve penalty because of its scandals, essentially preventing growth. This has clearly weighed on the stock in recent years. However, if Scharf and the rest of the bank's management can demonstrate they've truly changed the bank's culture, the penalty could be removed. I view this as highly likely to happen in 2021, which could be a huge tailwind.
- Expense controls: Wells Fargo has severely lagged its big-bank peers in recent years when it comes to expense controls, and the bank's efficiency has suffered. However, this is a priority for Scharf, who aims to cut $10 billion in annual expenses.
- Potentially rising interest rates: To put it mildly, I think the market is dramatically underestimating the possibility that interest rates will rise in 2021. We all know the Federal Reserve plans to keep its benchmark rates low, but if inflation starts to heat up due to all the stimulus that's been injected into the economy, it may not have a choice.
Could Wells Fargo be the best banking play for 2021 and beyond?
To be clear, I have absolutely no idea what Wells Fargo's stock price will do in 2021, especially while the pandemic is still going on. There's simply too much uncertainty surrounding the timetable for wide-scale vaccine availability and the return of the U.S. economy to pre-pandemic levels. But all signs are pointing toward light at the end of the tunnel at some point in 2021. With so many potential tailwinds after the pandemic, Wells Fargo could be a smart addition to your portfolio as 2020 comes to a close.
