Forget Wells Fargo (WFC), Add These 4 Bank Stocks Instead

Shares of Wells Fargo & Company WFC have lost more than 2% year to date amid industry-wide weakness and legal issues, underperforming the industry’s rally of 9.5%.

While the San Francisco, CA-based banking giant recorded growing deposits and loan balances over the past few years, displayed a strong capital position and remained focused on undertaking strategic acquisitions, the recent litigation issues have primarily challenged its profitability.

Troubles have been mounting for Wells Fargo, following the revelation of opening of millions of unauthorized accounts, last year. ‘Cross-selling,’ which has been the company’s key strength in recent years, drew regulators’ attention as they discovered that thousands of employees of the bank had unlawfully enrolled consumers in products and services without their knowledge or consent, in order to receive incentives for meeting sales targets. Though the bank is taking necessary steps to address the issue, it undoubtedly keeps the company’s financials under pressure for the near term.

In addition to the above, persistent rise in operating expenses over the last few quarters seems to be a concern for Wells Fargo. The company remains focused on expense management with the target of eliminating $4 billion of expenses by 2019. Nevertheless, we believe its bottom line will continue to be affected in the near term on legal expenses related to the above-mentioned sales scam and other litigation issues.

Additionally, Wells Fargo’s high debt burden remains another headwind. The company has debt-to-equity ratio of 1.32 compared with the industry average of 0.88. It underlines the financial instability of the company in an unstable economic environment.

Further, Wells Fargo’s quarterly dividend payment might not be sustainable as its earnings have been volatile for the last several quarters. Also, given its high debt level and above-industry dividend payout ratio, continuation of dividend payout is doubtful which is disadvantageous for value investors.

Moreover, Wells Fargo has been witnessing downward earnings estimate revisions over the last 60 days. The Zacks Consensus Estimate declined 4.3% to $3.97 for 2017. For 2018, it moved down 2.5% to $4.32 during the same time frame.

With Wells Fargo currently carrying a Zacks Rank #4 (Sell) and a Value Score of C, we don’t see it as an attractive investment option. Our research shows that stocks with a Value Score of A or B, when combined with a Zacks Rank #1 (Strong Buy) or 2 (Buy), offer the best upside potential.

Investing in large-cap stocks is often perceived as a safe strategy to stay afloat amid market turmoil. However, it may not meet expectations at all times.

Selecting the Winning Stocks

With the help of the Zacks Stock Screener, we have zeroed in on four finance stocks with market capitalization of more than $500 million. All these stocks carry a Zacks Rank #1 or 2 and have expected long-term (3-5 years) EPS growth rate of more than 8%.Further, these have a Value Score of A or B.

You can see the complete list of today’s Zacks #1 Rank stocks here.

Here are the four stocks that met the criteria:

First Interstate BancSystem, Inc. FIBK, headquartered in Billings, is the bank holding company for First Interstate Bank providing various banking products and services in the United States.

Zacks Rank: #2
Value Score: B
Expected EPS Growth (3-5 years): 9%

South Bend, IN-based 1st Source Corp. SRCE, operating as the bank holding company for 1st Source Bank, provides commercial and consumer banking services, trust and investment management services, and insurance to individual and business clients in the United States.

Zacks Rank: #2
Value Score: B
Expected EPS Growth (3-5 years): 10%

Heritage Commerce Corp. HTBK, headquartered in San Jose, operates as the bank holding company for Heritage Bank of Commerce, providing various commercial and personal banking services to residents and the business or professional community in California.

Zacks Rank: #2
Value Score: B
Expected EPS Growth (3-5 years): 10%

Los Angeles, CA-based Preferred Bank PFBC provides various commercial banking products and services to small and mid-sized businesses, entrepreneurs, real estate developers and investors, professionals and high net worth individuals in the United States.

Zacks Rank: #2
Value Score: B
Expected EPS Growth (3-5 years): 10%

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Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
Wells Fargo & Company (WFC): Free Stock Analysis Report
First Interstate BancSystem, Inc. (FIBK): Free Stock Analysis Report
1st Source Corporation (SRCE): Free Stock Analysis Report
Preferred Bank (PFBC): Free Stock Analysis Report
Heritage Commerce Corp (HTBK): Free Stock Analysis Report
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