The traders on Fast Money discussed the direction of the financial sector, after they were beaten down in Tuesday action. There are concerns that these stocks will need to take a breather after advancing so quickly in the aftermath of the stress tests and with many paying back their TARP loans. The traders discussed the fact that we are not really sure what bank earnings are going to look like when things normalize. Guy Adami relayed that he had heard that Wells Fargo (NYSE:WFC) had doubts about being able to earn itself out of its TARP required payments, and could be looking to raise capital through a secondary.
“Wells Fargo has been a fascinating stock. Rallied all the way back to the $29 level, on the premise they’re going to pay their TARP back by earning their way out of it. Now I’m hearing from a couple people that maybe there’s another secondary coming from Wells Fargo. That would be very interesting. What would be more interesting to see how it trades after the fact. I happen to think it’s a short I think the financials are short I know that’s a dangerous trade but that one would really get you going…
Late last week, the Wells Fargo news started really then, and continues now into today talking about the potential of a secondary. Something, some reason to raise maybe pushing the stock lower. We talked about incredible put activity last week. Stock has been fighting that ever since, got up towards $29 stock easing back a little bit, starting to get to that accelerated move to the down side…A lot of put buying in Wells Fargo maybe based on the speculation you would see a pullback if they did a secondary. You can get past that. But it would tell you, maybe they don’t think they’re going to earn their way out as quickly as thought.” — CNBC’s Fast Money 8/11/2009
We must clarify, as did Adami, that at this point this is nothing more than speculation. However, rumors can and do move stocks, and you are seeing the increased activity of Wells Fargo put options recently. So, this is something that investors in WFC should at least be aware of.
It is not all that often that we agree with the Fast Money traders, but we are in agreement on the financial stocks at this juncture. Most of the large banks have appreciated so quickly as the green shoots were sprouting, and now they are overvalued when judged on their hazing earnings outlook. Earnings have not yet normalized and it is incredibly difficult to predict what these companies will be able to earn over the next four quarters. With the amount of uncertainty that remains in the broad economy, we think that some financial stocks have had too much of a run for us to be interested.
In this regard, Wells Fargo is no exception, having more than tripled in the last 5 months. The bank has reported two quarters in a row that were stronger than expected, but substantial exposure to real estate debt remains on the balance sheet. Also, it was quite telling that management at Wells Fargo decided against repaying the TARP last quarter, as many of their competitors did. Whether Wells does or does not in fact make an effort to raise more capital is not really going to change our stance on the stock. For the time being, the fundamentals are too unpredictable to justify this run, and we are reaffirming our Overvalued rating on WFC.