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Undervalued Wells Fargo Stock Could Be Poised For Big Gains

It’s safe to say Wells Fargo (NYSE:WFC) isn’t doing too hot. Even for a money-center bank, which have been hit hard by recent events. Bank stocks have fallen massively since the start of 2020. But, Wells Fargo stock may have been the hardest hit compared to its big bank rivals.

Year-to-date, Bank of America (NYSE:BAC) stock is down 34%. Citigroup (NYSE:C) is down 37.1%. Wells Fargo? It’s year-to-date losses (44.8%) seriously exceed both.

And that’s no surprise. Even before the novel coronavirus pandemic, and the Federal Reserve’s subsequent slashing of interest rates, it was tough times for this venerable banking giant. With an imposed asset cap still in place from its prior fake accounts scandal, dividends and buybacks were pretty much the only means to jolt-up the stock price.

But in the current environment, these financial engineering moves are off the table. Add in the recently-posted losses, and its no surprise investors have bailed out of Wells Fargo stock.

Prices have held steady around $25 a share. In the meantime, there doesn’t appear to be a way for shares to head higher in the near-term.

Or is there? Instead of this stock being a “waiting for the other shoe to drop” situation, what if it’s a “darkest before the dawn” scenario? That is to say, a rebound might be just around the corner.

With a low valuation, and risks more than priced into shares, a contrarian wager on this beaten-down bank stock could be a shrewd opportunity.

Wells Fargo Stock and ‘The New Normal’

As InvestorPlace’s Dana Blankenhorn wrote July 15, the biggest problem for Wells Fargo and its peers is that no one needs banking right now. In other words, with the U.S. government pumping trillions to shore up the floundering economy, there isn’t much demand for lending services.

Add in this bank’s old-school business model (physical locations, heavy overhead costs), and it’s easy to see why investors have sold-off en masse. Until WFC returns to profitability, and starts rewarding shareholders again with dividends and buybacks, it’s tough to see this stock moving higher anytime soon.

But a rebound could be just around the corner. At least, that’s the view of Evercore ISI’s John Pancari. The analyst recently rated shares the equivalent of a “buy” rating. His rationale? First, by slashing the dividend and building up loss reserves, the bank is well-positioned in case the economic downturn worsens.

Second, the company’s plan to cut annual expenses by $10 billion is a major step in the right direction. Add in the stock’s current low valuation, and its easy to see why Pancari sees today’s prices as a strong entry point for the stock.

Potential Rebound Outweighs Risks Shares Haven’t Bottomed-Out

It’s easy to put together a bull case for Wells Fargo stock at today’s prices. Sure, recent events have set WFC stock back in a big way. But with the company making proactive moves to turn things around, it’s more than possible that shares could bounce back to much higher prices than present.

Yet there’s no guarantee shares have bottomed-out. If things deteriorate further, shares could fall off another cliff. However, this risk may be more than priced into the stock.

Right now, Wells Fargo stock trades for around 80% of its tangible book value. By comparison, Bank of America and JPMorganChase (NYSE:JPM) sell at valuations well above their book value.

Yes, considering the bad shape this money-center bank is in, it makes sense for shares to trade at a discount. On the other hand, you can take this low valuation to be a “margin of safety” that could minimize the risk shares fall further from here.

In short, it may take a while for shares to reach $36 per share (InvestorPlace analyst Luke Lango’s recent price target for the stock). But chances are shares won’t fall substantially further if the much-touted turnaround plan falls short of expectations.

Don’t Bet The Ranch, But Consider Wells Fargo a Buy

This money-center bank faces multiple challenges. But with a solid turnaround plan in motion and the stock sporting a low valuation, this may be the best opportunity out there to place a contrarian bet on the hard-hit banking sector.

However, shares remain highly speculative. With many factors outside the company’s control (the pandemic, interest rate policy), it’s no slam-dunk that they can pull off a turnaround.

So what’s the play? Don’t bet the ranch, but consider Wells Fargo stock a cautious buy.

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