$WFC Q4 Earnings Cheat Sheet

by Enis January 13, 2014 11:24 am • Commentary

Event:  WFC reports its fiscal Q4 earnings tomorrow on Tuesday, January 14th before the open.  The options market is implying about a 2.75% one day move, which is above both the 4 qtr avg of about 1.85% and the 8 qtr avg of about 1.65%.

Sentiment:  Wall Street analysts are mixed on the stock, with 20 Buys, 19 Holds and 2 Sells, with an average 12 month price target of around $48.  WFC is trading at a new all-time high after doubling since its fall 2011 lows.

Options Open Interest:  Open interest, like many other mega cap stocks, is skewed towards puts (685k vs. 581k calls) given the stock’s big rally and much of the open interest in puts at far lower strikes.  However, recent activity over the past month has been skewed to calls by a ratio of 1.5 to 1.  The Jan18th 44 calls have over 100k of open interest, by far the most of any near-term maturity.  The Jan15 45 calls and the Jan15 35 puts have more than 20k of open interest farther out.

Price Action / Technicals:  WFC is at a new all-time high, so the stock has no real resistance on the upside.  The stock has tended to rally into earnings and sell off after the event (down after 4 of the past 5 earnings events), though WFC does have important support only a few percent below the current stock price, in the $44-$45 area (rising 50 day moving average and July high)

WFC daily, 50 day ma in pink, 200 day ma in yellow, Courtesy of Bloomberg
WFC daily, 50 day ma in pink, 200 day ma in yellow, Courtesy of Bloomberg

Longer-term support lies in the $39-$40 area which was the high for the stock in 2007, and a breakout spot in early 2013 that has not been breached.

Volatility:   Implied volatility in WFC is the lowest it has been prior to an earnings event over the past year:

WFC 30 day implied volatility, Courtesy of LiveVolPro
WFC 30 day implied volatility, Courtesy of LiveVolPro

Like JPM, WFC has not had a big move on earnings since 2011, so options traders have reduced options prices for WFC events.  Implied volatility is likely to fall into the low teens after the event.

Our View:  WFC is the largest lender in the residential real estate market in the U.S. (adding together mortgages and home equity loans), so the company has been a major beneficiary of the improvement in the housing market.  The rise in rates in the second half of 2013 is another potential positive as long as loan demand does not decline as a result.  This week’s report will offer a good gauge of that trade-off heading into 2014.

Expected earnings growth in 2014 and 2015 is only between 0 and 5%, so the overall bar for WFC in the new year is lower than many other banking stocks.  However, that also means that investors don’t expect any missteps.  The stock has a clean uptrend on the technical side of the equation, and with no major surprises expected on the report, a move to support is likely to find buyers.