Wells Fargo Stock Has Been Beaten Down. Could Bounce Back.

The biggest banks have reported earnings—and investors can be forgiven if they’re unsure of where the opportunities are now. The answer might lie in how much uncertainty they are willing to embrace.

Analysts warned that the quarter would be “sloppy” and “confusing,” and the banks didn’t disappoint. There were the things that we expected to see—a surge in trading activity and increased loan-loss provisions—but there was also a wide dispersion in performance, between commercial banks and investment banks, to be sure, but also among individual banks.

JPMorgan Chase (ticker: JPM) was first out of the gate, and while it wowed Wall Street with its trading profits, the bank had to put $10.5 billion aside to cover potentially bad loans. CEO Jamie Dimon struck a cautious tone on the economic recovery during an analyst call, telling investors that the bank is “prepared for the worst case.” Still, JPMorgan stock managed to finish the week up 2%.

The rest of the big banks weren’t so lucky. Citigroup (C) was helped by trading, too, but still saw profits fall by 73%. Bank of America (BAC) had lower-than-expected loan-loss provisions, but traders worried about the bank’s falling net interest income, which could be a problem for a while due to perpetually low interest rates. Citigroup stock fell 4.6% for the week, while Bank of America dropped 3.3%.

Pure-play investment banks, with their smaller loan books, were expected to outperform the more rate-sensitive money-center banks—and they did. But few probably expected the gulf between Morgan Stanley (MS) and Goldman Sachs Group (GS) to be as wide as it was. While Goldman Sachs’ profits were flat compared with the year-ago quarter—burdened by $945 million in litigation and regulatory expenses—Morgan Stanley saw record-level quarterly revenues and profits. Its performance was so good that CEO James Gorman boasted about the health of its dividend at a time when other banks are struggling to cover theirs. Goldman stock rose 2.9% this past week, while Morgan Stanley gained 5.2%.

Given that setup, rushing into Morgan Stanley and Goldman might seem appealing, but even they are plagued by uncertainty as management noted that trading activity, while robust, has started to taper off. Pipelines for deal activity are also low and expected to stay low while economic conditions remain uncertain.

Might it be time to embrace the uncertainty and consider Wells Fargo (WFC), the most uncertain of the uncertain, and the worst-performing of the big banks this year? Shares are down by 53% in 2020, while the SPDR S&P Bank exchange traded-fund (KBE) is off by 34%. It would be easy to call Wells Fargo’s earnings a disaster, even knowing ahead of time that they would be bad. The reason: Wells Fargo, after stumbling in the Fed’s annual stress test, had told investors it would have to cut its dividend. And what a cut it was—to 10 cents from 51 cents, an 80% drop and below the 25 cents analysts had expected. Wells also posted its first quarterly loss since the last financial crisis as it built up reserves by $9.6 billion.

The problems were compounded by the fact that the bank is still in the regulatory doghouse following its fake-accounts scandal and is operating under a $2 trillion asset cap, which was only temporarily lifted by the Federal Reserve so that it could participate in the Paycheck Protection Program. All banks must contend with low interest rates and the potential of ballooning loan losses; Wells has fewer levers for growth.

But Wells has something the other banks don’t have: problems to fix. Wells Fargo acknowledged the underperformance due to its prior misdeeds. “We are responsible for the position we’re in,” recently appointed CEO Charlie Scharf said on a call with analysts. “We also recognize that we’ve been extremely inefficient for too long, and we will begin to take decisive actions, none of which will impact our risk and regulatory work, to increase our margins.”

Scharf said the bank is looking to cut about $10 billion in expenses, noting that it is less efficient than peers and adding that the “third-party spend here is extraordinary. The things that we rely on outside people to do is beyond anything that I’ve ever seen.”

Some analysts are starting to see signs of progress. Evercore ISI analyst John Pancari notes that Wells is making decisive moves to conserve capital and cut expenses. “The battle is likely to be a long one and revenue headwinds remain a lingering factor, but we believe the tide is turning on Wells fundamentals,” Pancari writes.

Wells Fargo’s stock is also cheap relative to its peers. It trades at 0.8 times tangible book value, compared with 1.6 times for JPMorgan Chase and 1.2 for Bank of America. For that to change, the bank needs to make progress toward getting out from under the asset cap and cutting its expenses, writes Edward Jones analyst Kyle Sanders. “Fixing these issues requires a talented management team (which we believe they now have) and time,” he writes.

Sure, there’s no guarantee that Wells can engineer a turnaround quickly. But if you’re looking for a comeback story, Wells Fargo is it.