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Wells Fargo is one of the most popular banking stocks on Robinhood. Should it be?

Wells Fargo (NYSE: WFC) was one of the worst performing stocks in the financial sector. Not only has the COVID-19 pandemic hit Wells Fargo harder than its peers, but the bank’s infamous “false accounts” scandal and numerous other issues in recent years have caused the bank to underperform even before . Since 2016, Wells Fargo’s total return has been -46%, well below the 36% total return of the ETFs of selected financial sectors (NYSEMKT:XLF) over the same period and well below the S&P 500 total return of 74%.

Despite the poor performance, Wells Fargo is one of the most popular bank stocks among investors on stock trading platform Robinhood. Nearly 98,000 Robinhood customers own shares of Wells Fargo – even more than its biggest rival JPMorgan Chase (NYSE: JPM). So let’s look at why investors might want to buy Wells Fargo, the key risks and issues investors should be aware of, and whether it might be a smart long-term investment at current levels.

Look Wells Fargo very cheap right now

First, let’s take a look at why you might consider Wells Fargo for your portfolio.

Image source: Wells Fargo.

On the one hand, the stock looks extremely cheap. It is trading for just 65% of its book value, which is almost as low as it has ever been during the financial crisis of 2008-09, when it looked like the banking system was about to break down. collapse. Over the past decade, Wells Fargo has spent most of its time at a valuation between 120% and 160% of book value, even after the fake accounts scandal and other bad behavior came to light.

Table of WFC price to book value

WFC Price to Book Value data by YCharts

Additionally, Wells Fargo generally has high asset quality and is a profitable financial institution. The only reason it recorded a loss in the second quarter of 2020 is that the bank set aside $8.4 billion to cover anticipated credit losses related to COVID-19 – without this the bank would have recorded a loss. $6 billion loss. profit, which is barely lower than its net income for the second quarter of 2019.

And, the bank is well capitalized, with key liquidity and capital ratios meeting or exceeding regulatory thresholds, so there is no reason to believe that Wells Fargo could face serious financial problems even if the recession is much worse. provided that.

But it’s cheap for a reason

That said, it’s important for investors to realize that, for now at least, Wells Fargo is cheap for a reason. Here are some of the key points investors should keep in mind before investing:

Wells Fargo focuses almost exclusively on commercial banking. The investment bank tends to perform well in turbulent times, which helps rivals that have large trading and underwriting operations. Wells Fargo doesn’t have that tailwind to offset the negative effects of the pandemic.

There is enormous uncertainty surrounding the pandemic and the US recession. If the economy can stay open, jobs can pick up, and Congress can agree a new stimulus package, the effects on banks could be relatively small. On the other hand, if government support largely dries up and unemployment remains high, it could lead to a wave of defaults. Wells Fargo now has more than $20 billion set aside to cover credit losses. That might sound like a huge amount of money (and it is), but keep in mind that Wells Fargo has a $971 billion loan portfolio, so if the economy really pity, it may not be enough.

Finally, the Wells Fargo fake account scandal and other issues of recent years still plague the company. While new CEO Charlie Scharf is taking smart steps to bank all of his recent drama, I wouldn’t exactly say it’s in the rearview mirror just yet.

Is Wells Fargo a smart long-term investment?

Ultimately, despite its short-term headwinds, Wells Fargo could be a solid choice for patient long-term investors. Just be aware that the stock carries considerable risk and the race is likely to be bumpy until the economic effects of the COVID-19 pandemic become clearer.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end consulting service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.