Is Wells Fargo A Good Stock To Buy Right Now?

Last year, Wells Fargo (WFC) had its highest mortgage fees since 2009. This combined with gains from reduced delinquencies thanks to the government’s Home Affordable Refinance Program and record low interest rates made for a solid first quarter. Wells Fargo reported $21.64 billion in revenue, versus analyst estimates of $20.24B. The company’s first quarter earnings per share was 75 cents, versus estimates of 72 cents. The numbers were really good, but they weren’t great.

Wells Fargo was able to outpace analyst predictions regarding its first quarter revenue by just under 7% and the earnings the company reported were barely 4% higher than analyst expectations. In comparison, JP Morgan (JPM)’s first quarter performance eclipsed that of Wells Fargo. The company’s revenues outpaced analyst expectations by more than 9%, reporting $26.7 billion in revenue while analysts were estimating $24.4 billion. JP Morgan also pushed past analyst estimate regarding its earnings per share by around 17%, at $1.31 a share, versus estimates of $1.12 a share.

Wells Fargo & Co (NYSE:WFC)

Wells Fargo and JP Morgan may be neck and neck with regards to dividends – JP Morgan is paying 2.70% yield right now while Wells Fargo is paying 2.60% yield – but Wells Fargo just doesn’t have the upside. JP Morgan is trading at $44 a share and carries a mean one-year target estimate of $52.47 – all in all, that is an average estimated one-year upside of over 19% and doesn’t even include its dividend. Now, look at Wells Fargo. It is trading at $33 a share with a mean one-year target estimate of $37.53 – that’s an upside of less than 14%.

Wells Fargo does have a higher earnings growth estimate. Analysts estimate the company’s earnings will increase by an average of 9.55% per annum over the next five year. In comparison, analysts are estimating an average yearly earnings growth rate of 9.26% for its industry, 10.60% for the market at large, and just 7.63% a year over the next five years for JP Morgan. However, Wells Fargo is priced higher than JP Morgan, at 9.05 times its future earnings. JP Morgan has a forward price to earnings ratio of just 7.94.

All in all, it looks like JP Morgan is the better pick, which goes to show why you can’t look at a company on its own. Stock performance is relative and so are many metrics. If you looked at Wells Fargo on its own, you might see the dividend, the comparatively low forward price to earnings ratio and the analyst earnings estimates that show the company out pacing its industry over the next five years, on average, and think that Wells Fargo is a great investment. The thing is, it is not that Wells Fargo is bad. Rather, it’s just that JP Morgan is better.

Now, consider some of Wells Fargo’s peers. Citigroup (C) has a massive predicted upside of almost 28% over the next 12 months between its current trade price of $34 a share and its mean one-year target estimate of $43.45 a share and including its measly 4 cents dividend. Between that, its low forward price to earnings ratio of just 7.17, and an analyst earnings growth estimate of 9.58% a year on average over the next five years, you might think that Citigroup is a good buy – and perhaps it is if speculation is your thing. But, what those numbers do not show is that Citigroup failed the Fed’s stress test.

Next, look at Capital One (COF). It is trading at $54 a share right now and has a one-year target estimate of $62.39. The company also pays a 20 cents dividend. Overall, this means that investors buying in today would likely earn 16% on their investments in the company over the next 12 months. Capital One is priced a little lower, at 7.86 times its forward earnings and it has an analyst earnings growth estimate of 8.67% a year on average over the next five years. Again, it all looks pretty good, but look at the upside with JP Morgan and the massive difference in dividends.

Another good example of the need to scratch past the surface is Bank of America (BAC). This company recently traded at $9 a share on a one-year target estimate of roughly $10 a share, making for a predicted upside of just 11%, and it pays just a dividend of just 4 cents. Bank of America is also priced fairly low, with a forward price to earnings ratio of 8.31. It all looks okay, but dig deeper.

Analysts are predicting that Bank of America’s earnings will increase by 15% a year on average over the next five years, which is practically double the estimated performance of JP Morgan. Further, keep in mind that while Bank of America did pass the Fed’s stress test, it is opting to not increase dividends this year, instead choosing to wait until it is in a better position financially. This means that while Bank of America isn’t going to provide much upside in the short term (i.e. 12 months), it could be a dominate player in its industry when looking at the next five years. The stock has been on a rally lately, returning over 65% in the first quarter, so investors looking to buy in may want to wait until the stock’s momentum is down to get the best deal. Either way, it doesn’t look like Bank of America is going anywhere but up – not that you could tell by its numbers alone.

Wells Fargo may have had a good first quarter, but looking at its peers puts those numbers into better perspective. I recommend investors look to JP Morgan for the shorter term and Bank of America for the long term in order to get the most upside from this industry. Hedge fund manager Ray Dalio seems to agree. His Bridgewater Associates sold out of its position in Wells Fargo in the fourth quarter 2011 and increased its holding in Bank of America during the same period. Bruce Kovner’s Caxton Associates also seem to be on the same page. The fund sold out of its position in Wells Fargo during the fourth quarter while increasing its stake in JP Morgan.