Wells Fargo (NYSE: WFC) has been the focus of a lot of unpleasant attention this year after regulators announced in September 2016 that thousands of its employees spent years opening millions of unauthorized fake accounts for customers in order to drive up the bank's cross-sale ratio. This has been bad for current shareholders of the nation's third-biggest bank by assets, but it might present an opportunity for enterprising investors who don't already own its stock.
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There are three reasons to believe that Wells Fargo stock is cheap today. Though, given where the market is right now, as well as the fact that Wells Fargo could still face further regulatory and legal fallout from the frauds, this doesn't necessarily mean investors should immediately jump to buy shares.
1. Recent stock performance
The first reason Wells Fargo's shares come across as cheap is that they are underperforming other bank stocks, as well as the broader market. Wells Fargo's stock is down 1.5% year to date. That's not horrible in and of itself, but it looks dismal when juxtaposed against its peer group. The average stock price of the 20 biggest banks in the country has climbed 10.2% this year.
It's worth remembering that bank stocks in general have soared over the past 12 months. Since this time last year, the KBW Bank Index, which tracks shares of two dozen large-cap bank stocks, is up 31%.
The outcome of last year's presidential election served as a key catalyst for that rise, as then-candidate Donald Trump had promised to "dismantle" the consumer protections of the Dodd-Frank Act of 2010, and reduce the corporate tax rate. The former change would enable banks to make more money, while the latter would allow them to keep more of the money they make.
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But even though Wells Fargo's stock has participated in this rally, it hasn't benefited as much as most of its peers. Since this time last year, shares of the California-based bank are up 19%. That ain't bad, but it's well below other large banks.
2. 52-week high
One of the metrics that investors look at when deciding whether to buy a stock is its 52-week high. The implication is that stocks furthest from their top prices over the past year, holding all else equal, offer more upside potential.
This would seem to bode well for Wells Fargo. Over the past year, the bank's share price topped out at $59.99. Today, they're around $54 a share -- 10% below that 52-week high.
Now, to be clear, a 10% discount isn't huge when it comes to this measure, but it's nevertheless a bigger discount than the typical blue-chip bank stock. Among the 20 biggest banks in the country, the average stock is trading for 6% below its 52-week high. Just like the underperformance of Wells Fargo's stock this year, this suggests that its shares have more upward potential than other big bank stocks.
The third reason that Wells Fargo's stock seems cheap is that it trades at a lower valuation than the typical big bank stock. You can see this by looking at the bank's price-to-earnings ratio, which is calculated by taking a bank's share price divided by its earnings per share.
The average big bank trades for 14 times expected earnings over the next 12 months. In effect, this means that it costs an investor $14 to buy ever $1 worth of estimated annual earnings. Wells Fargo comes in below that. It's price-to-earnings multiple is 13.5. That's not a lot less than the average bank stock, but it is less.
Now, as I said at the outset, none of this necessarily means that you should run out and buy Wells Fargo's stock right now. After all, with the broader market at record highs, all stocks could be due for a correction, including bank stocks. Additionally, there's reason to believe that Wells Fargo is almost certainly not done absorbing the costs associated with its fake-account scandal. That said, if you're a value investor on the hunt for bank stocks, Wells Fargo is worth adding to your watch list.
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