Sell Off In Wells Fargo Offers Opportunity To Buy Stock Which Is 'Rarely Cheap Enough To Do So'

• Having declined over the past one month, Wells Fargo & Co WFC shares are down 6 percent since December 14.
• Keefe, Bruyette & Woods’ Christopher Mutascio upgraded the rating for the company from Market Perform to Outperform, while establishing a price target of $60.
• The recent pullback in shares offers a buying opportunity for a stock that is rarely “cheap enough,” Mutascio stated.

Although Wells Fargo’s shares are currently trading at a moderate premium to the group median, the premium is “warranted, in our view, given the company’s superior profitability” as is reflected by the projected 2016 ROA of 1.32 percent, versus the peer group median of 1.00 percent, analyst Christopher Mutascio said.

He added that only U.S. Bancorp USB is expected to generate an ROA that is higher than Wells Fargo’s in 2016. While the 2016 ROA of U.S. Bancorp is projected at 1.43 percent, its shares trade at “more than half a multiple point premium” to Wells Fargo’s shares.

Mutascio commented further that the recent pullback in shares offers an opportunity for investors “to improve the quality of their portfolios by building positions in names that are rarely “cheap enough” to do so.” The upgrade takes into account the robust return potential, strong dividend yield and superior profitability measures.

The analyst also cited leverage to rising interest rates, reasonable valuation, and potential upside to Keefe, Bruyette & Woods’ current EPS estimates owing to the pending acquisition of GE Capital loans and platforms as the strengths. Mutascio expects pending 1Q16 acquisition to add $0.06-$0.09 per share annually.

In the report Keefe, Bruyette & Woods noted, “WFC is a high-quality and well-managed franchise that seems to have numerous levers to pull in order to hit EPS expectations during the current revenue-challenged operating environment.”