Q2 STOCKS TO BUY

2 Bank Stocks Downgraded Before Earnings

WFC is trading near its historically bearish 160-day trendline

Jul 12, 2019 at 11:32 AM
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Most bank stocks got a boost yesterday, after Fed Vice Chair Randal Quarles said the central bank would announce changes to the Volcker Rule later this year as a means of deregulating the financial industry. Nevertheless, Citigroup sees headwinds for the sector, saying a 100-basis point Fed rate cut could pull down U.S. banks earnings per share (EPS) by 5% in the first year, and 9% in the second. The brokerage firm also lowered its outlook for Wells Fargo & Co (NYSE:WFC), while Huntington Bancshares (NASDAQ:HBAN) was hit with a bear note at BMO -- sending both stocks lower in early trading today.

2 Reasons to Be Cautious on Wells Fargo Stock

Citi downgraded Wells Fargo to "neutral" from "buy," and cut its price target to $51 from $56. The brokerage firm said it sees "limited upside from current levels," and will wait for a more "attractive entry point." At last check, WFC stock was trading down 0.2% at $47.06, bringing its weekly deficit to 1.5%.

This negative price action is nothing new for Wells Fargo, which has shed 16% year-over-year. Plus, a recent rally off its late-May lows near $44 brought the shares back up to their 160-day moving average -- a trendline that's had historically bearish implications for WFC.

According to Schaeffer's Senior Quantitative Analyst Rocky White, there have been nine other times in the past three years the bank stock has come within one standard deviation of this trendline after a lengthy stretch below it. Following these prior signals, Wells Fargo was down 87% of the time one month later, averaging a loss of 4.1%.

Adding a potential headwind is Wells Fargo's upcoming earnings report, scheduled for release ahead of the open next Tuesday, July 16. WFC stock has closed lower in the session subsequent to earnings in seven of the past eight quarters, including a 2.6% drop in April and a 1.2% decline after its year-ago results. This time around, the options market is pricing in a 2.7% next-day move, regardless of direction.

wfc stock daily price chart on july 12

Huntington Bancshares Holds Above Support

Huntington Bancshares was downgraded to"underperform" from "market perform" at BMO, which said profitability will be hard to sustain amid net interest margin headwinds. The brokerage firm also cut its 2019 EPS estimates for regional banks by 2% to 3% ahead of a possible three rate cuts from the Fed through September 2020.

HBAN stock is down 0.3% at last check at $13.82, set to snap a two-week winning streak. Since an early June low of $12.58, though, the shares have gained almost 10%, and have regained a foothold atop their 200-day moving average. Year-to-date, the equity is up almost 16%.

Earnings from Huntington Bancshares are scheduled for the morning of Thursday, July 25, and similar to its big-cap peer, the stock has a history of negative earnings reactions. Specifically, HBAN has closed lower the day after earnings six times in the past two years, averaging a loss of 1.7%.

Short sellers have been ramping up their exposure before earnings, with short interest up 4.5% in the two most recent reporting periods. The bearish bandwagon is far from full, though, considering the 23.94 million HBAN shares controlled by shorts accounts for just 2.5% of the stock's available float.

hban stock daily price chart on july 12

 
 

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