With shares of Wells Fargo (NYSE: WFC) up 26% since the presidential election last November, it's notable that many analysts still think investors should buy the stock.
Of the 33 analysts who rate Wells Fargo and are tracked by Yahoo! Finance, more than a third of them, or 13, say the bank's stock is either a "buy" or a "strong buy." Meanwhile, 14 say it's a "hold," while six rate it either "underperform" or "sell."
Data source: Yahoo! Finance. Chart by author.
Yahoo! Finance takes it one step further by combining analysts' ratings into a single score -- Wells Fargo comes in at 2.8. Because that's less than 3.0, which is the demarcation point between bearish and bullish scores, this means that analysts are slightly bullish on Wells Fargo stock.
One thing that's interesting is that the consensus price target for shares of Wells Fargo is $58.29 per share, which, for all intents and purposes, is indistinguishable from its current price of $58.21 per share. This seems to imply that analysts haven't updated their ratings as Wells Fargo's stock has climbed over the last few months.
That aside, there are at least two reasons that analysts recommend Wells Fargo stock.
The first is that interest rates are in the process of climbing higher, which will boost revenue at Wells Fargo and throughout the bank industry. The Federal Reserve has raised rates twice since the financial crisis -- once at the end of 2015 and a second time at the end of last year. And if multiple high-ranking members of its monetary policy committee are to be believed, the Fed is on the verge of raising rates for a third time, which could happen at its meeting this month.
"[W]e currently judge that it will be appropriate to gradually increase the federal funds rate if the economic data continue to come in about as we expect," Fed Chairwoman Janet Yellen said in a speech to the Executives' Club of Chicago. "Indeed, at our meeting later this month, the Committee will evaluate whether employment and inflation are continuing to evolve in line with our expectations, in which case a further adjustment of the federal funds rate would likely be appropriate."
Fed Vice Chairman Stanley Fischer recently said the same thing. "If there has been a conscious effort" to boost expectations of a rate increase, "I'm about to join it," he told attendees of a monetary policy forum in New York. "I think the advice that has been given by a large number of members of the Fed, of the FOMC [Federal Open Market Committee], is correct, and I strongly support it."
The Wells Fargo building towers over downtown Portland, Oregon. Image source: Getty Images.
Wells Fargo isn't as transparent as other banks are about how much higher rates will help it, but there's no question that they will. In its latest 10-K(page 91), it estimates that if the fed funds rate exceeds 2% in the next 24 months, then its earnings could rise by as much as 5% compared to a lower-rate scenario.
Further fueling optimism toward Wells Fargo and other bank stocks are the current presidential administration's vows to deregulate the banking industry by installing sympathetic personnel atop the agencies. This could free banks up to increase their dividends and stock buybacks. It could also defang the Consumer Financial Protection Bureau, which has been a thorn in Wells Fargo's side since it fined the bank $100 million last September for opening millions of checking accounts for customers without their approval to do so.
The net result is that higher interest rates will boost revenue throughout the industry while an easing of regulations should lower costs. It remains to be seen if these trends will in fact materialize, but it's the hope that they do that has propelled shares of Wells Fargo and other banks higher over the past few months.
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