Avoid Wells Fargo (WFC), Buy These 3 Bank Stocks Instead

Shares of Wells Fargo & Company (NYSE:WFC) have lost more than 24% in 2018 amid industry-wide volatility and legal issues compared with the industry’s decline of 18.4%.

While this San Francisco, CA-based banking giant recorded growing deposits and loan balances in the past, displayed a strong capital position and remained focused on undertaking strategic acquisitions, the prevailing litigation issues have primarily challenged its profitability. Moreover, sluggish demand has impacted loan growth in the last few quarters as well.

Troubles have been mounting for Wells Fargo, following the revelation of opening of millions of unauthorized accounts in 2016. ‘Cross-selling’, which has been the company’s key strength in recent years, drew regulators’ attention as they discovered that thousands of employees of the bank had unlawfully enrolled consumers in products and services without their knowledge or consent, in order to receive incentives for meeting sales targets.

Price Performance in 2018

Further, the bank has been slapped with new sanctions, including a cap on the assets position by the Federal Reserve. Disclosure of issues in its auto-insurance business, online bill pay services, and in the Wealth and Investment Management segments are also on the downside. Recently, in a major setback, the central bank rejected the company's scandal prevention plans and demanded a stricter check over management. With the ongoing review process of business practices, more wrongdoings may be revealed, increasing negative impact on the company’s top line and reputational headwinds for the bank.

In addition to the above, persistent rise in operating expenses over the last few quarters has been another concern for Wells Fargo. The company remains focused on expense management, with the target of eliminating $4 billion of expenses by 2019. Nevertheless, we believe its bottom line will continue to be affected in the near term on legal expenses.

Moreover, the bank’s mortgage banking business is under pressure. Wells Fargo, which was the largest mortgage originator in the United States as of 2017, has been experiencing lower mortgage originations due to a rising interest rate environment. Mortgage banking income recorded a negative three-year (2015-2017) CAGR of 18.2%, impacting overall top-line growth, with the decreasing trend continuing in the first nine months of 2018.

Additionally, Wells Fargo’s high debt burden remains another headwind. The company has debt-to-equity ratio of 1.26 compared with the industry average of 0.94. It underlines the financial instability of the company in a turbulent economic environment.

Furthermore, Wells Fargo’s quarterly dividend payment might not be sustainable as its earnings have been volatile for the last several quarters. Also, given the bank’s high debt level and above-industry dividend payout ratio, continuation of dividend payout is doubtful which is disadvantageous for investors.

In addition, Wells Fargo has been witnessing downward earnings estimate revisions for the last 90 days. The Zacks Consensus Estimate moved down around 1% to $5.13 for 2019.

With Wells Fargo currently carrying a Zacks Rank #3 (Hold) and a Growth Score of C, we don’t see it as an attractive investment option. Our research shows that stocks with a Growth Score of A or B, when combined with a Zacks Rank #1 (Strong Buy) or 2 (Buy), offer the best upside potential.

Investing in large cap stocks is often perceived as a safe strategy to stay afloat amid market turmoil. However, it may not meet expectations at all times.

Selecting the Winning Stocks

With the help of the Zacks Stock Screener, we have zeroed in on three bank stocks with market capitalization of more than $3 billion. All these stocks carry a Zacks Rank #1 or 2 and have expected long-term (3-5 years) EPS growth rate of 8% or more. Further, these have a Growth Score of A or B.

You can see the complete list of today’s Zacks #1 Rank stocks here.

Here are the three stocks that met the criteria:

IBERIABANK Corporation (NASDAQ:IBKC) , with a market cap of $3.7 billion, carries a Zacks Rank #2 and has a Growth Score of B. The bank has an expected long-term (3-5 years) EPS growth rate of 8%.

Wintrust Financial Corporation (NASDAQ:WTFC) carries a Zacks Rank of 2 and has a Growth Score of B. The company has a projected long-term (3-5 years) EPS growth rate of 13.5%. It has a market cap of $3.8 billion.

BB&T Corporation (NYSE:BBT) carries a Zacks Rank #2 and has a Growth Score of B. The company has an expected long-term (3-5 years) EPS growth rate of 10.54%. It has a market cap of $34.2 billion.

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