Daily Stock Pick for May 17, 2023

The thought of investing in bank stocks right now might fill you with a sense of dread – and for good reason.

Even after multiple bank failures and assurances from the Fed, the market is still jittery. Interest rates are still high – and banks are still sitting on (unrealized) losses estimated at well over $600 billion.

Many are simply waiting for the next bank to fall – with PacWest narrowly escaping being the latest domino just a couple of weeks ago.

So it’s no surprise that banking stocks aren’t exactly popular right now. The Regional Banking Index is down over 30% for the year. But as the saying goes – when others are fearful, it’s time to get greedy. 

Today’s daily stock pick is a banking stock that’s had its fair share of troubles. But these troubles are likely behind it. And now, a famed investor has just bought in, while a popular analyst has called it “the best capitalized bank” in the industry. And with its depressed stock price, now may be a good time to consider buying into this bank.

Wells Fargo & Company (WFC)

Google Wells Fargo today and the top news headlines will all be talking about the $1 billion it just agreed to pay to settle a shareholder lawsuit. The lawsuit is related to misleading statements made by the bank following its 2016 scandal about opening unauthorized customer accounts.

Taken at surface level, this would seem to be nothing but bad news. But that lawsuit has been hanging over Wells Fargo for years – and now it’s not. That removes one of the biggest things that can weigh a stock down – uncertainty. 

Yes, the lawsuit settlement was not good. But an unresolved lawsuit can be even worse.

With that now aside, Wells Fargo’s fundamentals still look pretty compelling. First-quarter results saw a solid 18% revenue growth, supported by an expanding net interest margin caused by the Fed’s rate hikes. From 2.16% in 1Q2022, its net interest margins hit 3.20% in 1Q2023 – an increase that saw its net income jump from $9.2 billion to $13.3 billion.

Net profit increased in tandem, rising 32% to hit $5 billion. That gives it an annual run rate of $20 billion, which when compared to its current market cap of $144 billion, gives it an attractive implied price-to-earnings ratio of just over 7x (the S&P 500’s P/E ratio is closer to 20x).

On top of all that, Jim Cramer just called Wells Fargo “the best-capitalized bank” right after the settlement was announced. Plus, famed Big Short investor Michael Burry has just taken a position in Wells Fargo stock. 

While everyone is backing off in fear, now may be the time to get greedy.

To your wealth,
Felix @ Ace of Investing