Listen to OIC's Wide World of Option 54: The Rebranding of OCC and Stock Repair On Profiles & Pe...
Jump Off the Wells Stagecoach
01/28/2008 12:00 am EST
Michael Shulman, editor of ChangeWave Shorts, says Wells Fargo makes a good short-sale candidate for investors who think financial stocks have more room to fall.
I have one more new short-side play for you: Wells Fargo (NYSE: WFC) is a great choice-and not just because of the subprime debacle.
Wells Fargo has 60% of its loans in traditional consumer sectors, according to Friedman Billings Ramsey (NYSE: FBR), and it is going to see negative growth in 2008 on an operating basis. Take a look at how it makes its profits (or hopes to):
1. Home and Mortgage Equity-19%
2. Consumer Finance-7%
3. Wholesale Banking/Commercial Real Estate-33%
If they're looking to the consumer to help them into recovery, they'd better think again. It's also worthy to note that the FBR analyst suggested that an even-greater percentage of WFC's revenues are consumer-driven (i.e., banking/credit card fees, service charges).
And since we're finding through our ChangeWave Alliance surveys that a number of folks are looking at paying down debt in 2008 with their discretionary dollars, no doubt that's going to take a bite out of WFC's revenues.
Better yet, let's look at [Wells's] $363-billion loan portfolio:
1. Real Estate (one- to four-family homes, primary mortgage)-18%
2. Real Estate (one- to four-family homes, secondary mortgage holder)-21%
3. Credit Card-5%
4. Revolving/Installment Loans-16%
5. Commercial Real Estate-9%
6. Construction Loans-5%
All of these categories hold loans that get riskier during a recession.
Over time, WFC will reveal more exposure to subprime, lousy credit cards, and terrible consumer debt-its figures will be smallish compared to most, but the problems are still there. This will force some write-downs and increases in loan-loss reserves.
But the real support for the WFC play is the end of the stock's growth story-the bank will hit a wall in 2008 and profits will slide, making the stock distinctly overvalued. The company also has very heavy exposure to the regions hit hardest by the housing downturn-California and the Sun Belt.
I like a short-side play in Wells Fargo for another reason: I have been looking for a fairly priced name in general consumer credit-and credit card debt-but premiums on puts for companies like Capital One are way too high to give us a significant-enough reward for our investment.
Not so for Wells Fargo-the puts are fairly priced and present a great opportunity: buy the Wells Fargo July 22.50 Puts (WFCSX) under $1.60. (They closed at around $0.90 while the stock closed below $31 Friday-Editor.)
(Editor's Note: Short selling is only for extremely risk-tolerant investors who can afford to lose the money they're putting up in these trades.)
Related Articles on OPTIONS
This rebroadcast of OIC's webinar panel program discusses how options professionals use technical an...
Are you curious about what Gamma Scalping is and how you can use it as a part of your investment str...
This rebroadcast of OIC's webinar panel discussion covers why implied volatility levels drive option...