A 3% drop by lunchtime on Friday should tell you everything you need to know about the market's reaction to Wells Fargo & Company's (NYSE: WFC) earnings report. While the finer details will need to be examined more closely over the weekend, it's looking for now at least that a headline beat on revenue and EPS wasn't enough.
Expectations would certainly have been high coming into the report, with Wells Fargo shares, like most of the big banks, rallying hard since October. While they'd traded slightly soft this week, they were still up the guts of 30% over the previous three months. They were also at their highest level since March 2022 and finally starting to look like they were on the verge of breaking out of the narrow range they’d been in since then.
But for those of us on the sidelines, this dip could be the entry opportunity we've been waiting for. Wells Fargo, along with most of the bank stocks, had a solid end to the year, thanks in large part to the prospect of falling rates from the Fed heading into 2024. It can be tough to chase a rising stock, though, and there would have been a fair number of investors who missed the chance to get in in the low $40s. Let's dive in and take a closer look at the long opportunity that's opening up.
Bullish headline numbers
So, on the face of it, it was a decent report. Both revenue and EPS topped analysts' expectations, and management went out of its way to speak to the bullish outlook they're taking with them into the new year. CEO Charlie Scharf spoke to the robust economic environment that's helping their bottom line, along with promising results from the company's focus on efficiency and credit discipline.
Wells Fargo is continuing to execute its strategic priorities, with early signs of improved growth and increased market share in certain segments, which should go a long way to tempting investors back in. Notably, the company's new credit card products have driven consumer spending above industry averages, while their Corporate and Investment Bank segment saw impressive revenue growth of 26%. Looking into 2024 and beyond, Wells Fargo's home lending strategy is expected to yield higher returns, while several opportunities to increase market share across most segments have been identified.
So why the drop in shares on Friday? It looks like the shine was taken off the overall report by the Federal Deposit Insurance Corporation's (FDIC) special assessment of the big banks and their insurance funds following the industry turbulence that rocked markets last March. For FY24, the bank is now expecting net interest income to be up to 9% lower than 2023's level, a gloomy outlook that the bulls could have done without.
But if that's the only headwind they're forecasting heading into 2024, it's not that bad. It's not all that unreasonable for shares to come off from their recent highs as the market prices the refreshed outlook into the stock, but it could well be a good thing in the long run.
Getting involved
Coming into Christmas week, shares of Wells Fargo had been on such a heater their RSI reading was in the stratosphere. Anything above 70 suggests extremely overbought conditions, and Wells Fargo's was above 85. This dip is helping it back to a far more neutral 45, which means once shares turn north again, there'll be a ton of room for them to run before they can be called overbought again.
MarketBeat's MarketRank Forecaster tool has them ranked a Moderate Buy, and a street-high price target of $66 is becoming more and more attractive with every red candle. Going into next week, it's pointing to a targeted upside of at least 40%, which should be enough to tempt the bulls. Look for shares to start consolidating by the middle of next week, with two consistent green days likely to signal the start of a run back up toward recent highs.
