This Week in Finance: Deutsche Bank AG (USA) (DB), Wells Fargo & Co (WFC) & Others

With all eyes on the Fed’s to-hike-or-not-to-hike interest rate decision next week, five major stocks captured traders’ attention in the week beginning September 12.

In this article, we take a closer look at why investors were buzzing about Deutsche Bank AG (USA) (NYSE:DB), Wells Fargo & Co (NYSE:WFC), JPMorgan Chase & Co. (NYSE:JPM), Bank of America Corp (NYSE:BAC), and E*TRADE Financial Corp (NASDAQ:ETFC) this trading week. In addition, we are going to present how the smart money investors from our database traded  the companies in question during the last quarter.

Hedge fund sentiment is an important metric for assessing the long-term profitability. At Insider Monkey, we track over 740 hedge funds, whose quarterly 13F filings we analyze and determine their collective sentiment towards several thousand stocks. However, our research has shown that the best strategy is to follow hedge funds into their small-cap picks. This approach can allow monthly returns of nearly 95 basis points above the market, as we determined through extensive backtests covering the period between 1999 and 2012 (see the details here).

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Deutsche Bank AG (USA) (NYSE:DB) shares fell 12.4% this week (versus the S&P 500’s 0.5% gain) after the Wall Street Journal reported that the Justice Department proposed the bank pay a $14 billion fine to settle various mortgage-securities cases related to the financial crisis. The proposed Justice Department fine is multiples of what the market previously expected (of around $2-$3 billion). The proposed fine is also significantly larger than the fines that other major banks (with the exception of Bank of America) had to pay in relation to the mortgage crisis. One can’t help but wonder if the proposed fine, which is close to Apple Inc. (NASDAQ:AAPL)’s back-tax bill of around $14 billion, could be parallel in some way. The U.S. might not have jurisdiction over tax policy in Europe, but it certainly has the right to punish bad behavior for acts that aided in the worst financial crisis since the Great Depression.

Understandably, Deutsche Bank has refused to play ball with the bill, responding that it “has no intent to settle these potential civil claims anywhere near the number cited”. The smart money was relatively underweight on Deutsche Bank during the second quarter. According to our database of around 750 funds, only 15 were long Deutsche Bank AG (USA) (NYSE:DB) at the end of June.

Like Deutsche Bank, Wells Fargo & Co (NYSE:WFC) made headlines in a bad way this week and its stock fell by 6.7% during the week on the back of the negative publicity. Although the bank may have settled the case of shady sales practices (such as fraudulently opening around 2 million customer accounts) with some government agencies for $185 million, the U.S. Attorney’s Offices for the Southern District of New York is still in the early stages of investigating the company. Although charges might not be filed, Wells Fargo has taken a sharp customer relations hit for the revelations that its former employees created so many accounts without customer consent to juice their numbers. Due to management’s subsequent decision to limit some cross-selling and to remove some targets for its retail branch, Wells Fargo might not generate as much return on capital as it might have done before. Although those moves to limit cross selling will help prevent future occurrences of shady behavior, some investors think Wells Fargo’s top boss, John Stumpf, might need to be a little more contrite to keep his job. An endorsement from Warren Buffett of Berkshire Hathaway, which owned around 480 million shares of Wells Fargo & Co (NYSE:WFC) at the end of the second quarter, would go a long way, but Buffett has been silent so far.

On the next page, we examine JPMorgan Chase & Co, Bank of America Corp, and E*TRADE Financial Corp.

Based on peer JPMorgan Chase & Co. (NYSE:JPM) and Bank of America Corp (NYSE:BAC)‘s previous interactions with scandals, Wells Fargo stock could be a good long-term buying opportunity. JPMorgan shares fell sharply after the London Whale scandal, and Bank of America’s stock retreated even more due to the robo-calling/mortgage related headlines in the previous years. Several years later, investors have forgotten about the events, and are bullish on both equities due to the strong U.S. economy and the expectation of an eventual interest rate hike, which would likely boost returns for both banks. The same could eventually happen to Wells Fargo (although it’s pretty much impossible to call a short term bottom on the event). Among the funds in our database, 99 were long JPMorgan Chase & Co. (NYSE:JPM), and 102 funds owned shares of Bank of America Corp (NYSE:BAC) at the end of the second quarter.

Not to be left out, E*TRADE Financial Corp (NASDAQ:ETFC) will also benefit from an interest rate normalization given that the company lends out money to margin traders and has a bank. Shares of the broker have done very well this week, gaining 6% since Monday. A total of 35 funds in our database owned $739.32 million worth of E*TRADE Financial Corp (NASDAQ:ETFC)’s stock, which accounted for 11.30% of the float on June 30, versus 39 funds and $775.92 million, respectively, a quarter earlier.

Disclosure: None