Wells Fargo Option Traders Bet Stock Will Drop 8% Further

(Please keep in mind that the author of this fundamental study is also a financial writer and portfolio manager.)

Wells Fargo & Co. (WFC) stock has dropped 20% from its 2018 high, owing in part to a slew of bank scandals. Options traders now predict that the stock will fall another 8% by early next year to its lowest level since September of 2017.

Technical examination This negative outlook is shared by analysts, who predict little revenue growth over the next two years.

WFC data by YCharts

Bearish Bets

Put options at the $52.50 strike price for January 18 expiry outnumber bullish call bets by a factor of three, with 79,000 open puts. Furthermore, open interest in options with a strike price of $50 has increased. A buyer of such puts would need the stock to fall to $49.10 from its current price of $53.28 in order to benefit.

Weak Technical Charts

The chart indicates that the stock is approaching resistance on a downtrend and is now trading above support at $52.40. If the stock falls below that support level, it is expected to revert to its low of roughly $50. The relative strength index has also been declining.

Bearish Sentiment

The unfavorable attitude is a consequence of the company’s projected sluggish revenue growth over the next two years. Revenue is expected to fall 1% in 2019 and climb just 2% in 2020, according to analysts. Analysts, on the other hand, have cut their revenue expectations by around 1% since the end of July.

YCharts’ WFC Revenue Estimates for the Current Fiscal Year

Analysts’ predictions of 18% profit growth in 2019 seem to be less substantial than they appear. This is because profit forecasts for 2018 have been declining in recent months.

Wells Fargo and the banking industry as a whole have had a difficult 2018, as investors are concerned about a flat yield curve and its possible effect on interest revenue. Furthermore, increased interest rates have slowed loan growth at several of the major banks. Wells Fargo’s stock is expected to suffer as long as these overhangs stay on the company.

Michael Kramer is the Founder and Manager of Mott Capital Management LLC, a registered investment advisor, and the manager of the firm’s actively managed, long-only Thematic Growth Portfolio. Kramer normally purchases and keeps equities for three to five years. Click here to see Kramer’s profile and portfolio holdings. The information offered is only for educational purposes and does not constitute an offer or solicitation to sell or buy any particular stocks, assets, or financial strategies. Unless otherwise specified, investments involve risk and are not guaranteed. Before adopting any of the strategies outlined here, contact with a knowledgeable financial advisor and/or tax expert. The adviser will offer a list of all suggestions made in the previous twelve months upon request. Past performance does not predict future performance.

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