$WFC Q2 Earnings Cheat Sheet

by Enis July 10, 2014 12:39 pm • Commentary

Event:  WFC reports Q2 earnings tomorrow before the open.  The options market is implying about a 2% move, which is higher than both the 4 qtr avg move of 0.75% and the 8 qtr avg move of 1.25%.

Sentiment:  Wall Street analysts are relatively neutral on WFC, with 19 buys, 19 holds, and two sells, and an average 12 month price target of $4.  WFC has risen about 25% in the past year, and is already up 14% so far in 2014.  Short interest is negligible at 0.8% of the float.

Options Open Interest:  Total open interest is just about evenly split between calls and puts.  One month average volume has favored calls, by a ratio of 1.2 to 1.  Among short-dated options, the Jul 19th 52.50 calls have over 20k of open interest.  Farther out in maturity, the Jan15 45, 50, and 55 calls, and the Jan15 40 and 35 puts all have over 20k of open interest.  The Jan16 45 calls also have over 20k of open interest.

Price Action / Technicals:   The weekly chart in WFC illustrates the impressive uptrend in the stock since the August 2011 low in the low 20’s:
WFC weekly chart, 50 week moving average in pink
WFC weekly chart, 50 week moving average in pink, Courtesy of Bloomberg
The stock has not touched its 50 week moving average since late 2012, and it hit a new all-time high of $53.08 last week.  
I’ve marked in green the $50 level, which is the first support spot, before the rising 50 week ma now around $46.  Here is the daily chart with those levels marked in green:
WFC daily chart, Courtesy of Bloomberg
WFC daily chart, Courtesy of Bloomberg
The technical situation remains one of a strong long-term uptrend unless $46 is breached in the coming months.

Volatility Snapshot:  As has been the case in much of the market, the 30 day implied volatility for WFC ahead of earnings is lower than it has normally been just before earnings over the past 2 years:

30 day implied volatility in WFC, Courtesy of Bloomberg
30 day implied volatility in WFC, Courtesy of Bloomberg

With options pricing low on a relative basis, WFC implied volatility is unlikely to drop much below 13 after earnings.  What’s surprising is that there has not been more options demand given that WFC is already up 14% year-to-date and near a new all-time high, handily outperforming both the SPX index and the financials sector.


Our View:  This is what we wrote in last quarter’s WFC preview:

WFC is the best-in-class major bank, and has been an impressive leader so far in 2014, even while the financials etf, XLF, is actually negative on the year.  Given the weakness in the trading business of the investment banking heavy stocks, financial investors have been gravitating towards the consistency of WFC.  Of course, with that increase in price comes an increase in expectations, and WFC is more expensive than most of its banking peers.  As a result, the risk of a big move is likely more to the downside on this report.

That pretty much holds true this time around as well.  WFC is minimally exposed to the downturn in trading volumes, which is a risk for the investment banking names (see last week’s MorningWord post).

WFC has been a major megacap winner in 2014, and is the largest market cap financial stock, so the reaction to its report will be telling with regards to the overall demand for stocks at the start of earnings season.