Forget Wells Fargo (WFC), Buy These 3 Finance Stocks Instead

Shares of Wells Fargo (NYSE:WFC) have lost more than 2% over the last three months amid industry-wide volatility and legal issues, underperforming the industry’s rally of 4.3%.

While this San Francisco, CA-based banking giant recorded growing deposits and loan balances over the past few years, displayed a strong capital position and remained focused on undertaking strategic acquisitions, the ongoing litigation issues have primarily challenged its profitability.

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. Though the bank is taking necessary steps to address the issue, it undoubtedly keeps the company’s financials under pressure.

In addition to the above, persistent rise in operating expenses over the last few quarters is 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 related to the above-mentioned sales scam and other litigation issues.

Additionally, Wells Fargo’s high debt burden remains another headwind. The company has debt-to-equity ratio of 1.23 compared with the industry average of 0.91. It underlines the financial instability of the company in a turbulent economic environment.

Further, 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 value investors.

Moreover, Wells Fargo has been witnessing downward earnings estimate revisions for the last 30 days. The Zacks Consensus Estimate moved down slightly to $4.72 for 2018. For 2019, it edged down around 1% to $5.26 during the same timeframe.

With Wells Fargo currently carrying a Zacks Rank #3 (Hold) and a Value Score of C, we don’t see it as an attractive investment option. Our research shows that stocks with a Value 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 finance stocks with market capitalization of more than $10 billion. All these stocks carry a Zacks Rank #1 or 2 and have expected long-term (3-5 years) EPS growth rate of more than 10%. Further, these have a Value 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:

Morgan Stanley (NYSE:MS) , headquartered in New York City, is a financial holding company providing various financial products and services in the Americas, Europe, the Middle East, Africa and the Asia Pacific.

Zacks Rank: #2
Value Score: A
Expected EPS Growth (3-5 years): 12.86%

New York-based Citigroup (NYSE:C) , operating as a diversified financial services holding company, provides various financial products and services in North America, Latin America, Asia, Europe, the Middle East and Africa.

Zacks Rank: #2
Value Score: B
Expected EPS Growth (3-5 years): 10.77%

Ally Financial Inc. (NYSE:ALLY) , headquartered at Detroit, MI, provides various financial products and services for consumers, businesses, automotive dealers and corporate clients in the United States and Canada.

Zacks Rank: #2
Value Score: B
Expected EPS Growth (3-5 years): 12.67%

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