This Week in Finance: Wells Fargo, Bank of America, and 3 Others

Several major bank and brokerage stocks captured investors’ interest this week as a number of catalysts affected the financial sector.

In this article, we’ll take a closer look at why Wells Fargo & Co (NYSE:WFC), Deutsche Bank AG (USA) (NYSE:DB), Bank of America Corp (NYSE:BAC), JPMorgan Chase & Co. (NYSE:JPM), and E*TRADE Financial Corp (NASDAQ:ETFC) were each in the spotlight this week. We’ll also use the latest 13F regulatory filing data to see how the five stocks were being traded among hedge funds’ from March 31 to June 30.

While there are many metrics that investors can assess in the investment process, the hedge fund sentiment is something that is often overlooked. However, hedge funds and other institutional investors allocate significant resources while making their bets and their long-term focus makes them the perfect investors to emulate. This is supported by our research, which determined that following the small-cap stocks that hedge funds are collectively bullish on can help a smaller investor to beat the S&P 500 by around 95 basis points per month (see the details here).

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Wells Fargo & Co (NYSE:WFC) put one of its rare missteps behind it this week after the bank settled with government regulators over allegations of ‘widespread illegal practices’ that included the company’s employees opening more than 2 million credit card and deposit accounts to juice their numbers. According to the settlement terms, Wells Fargo neither admits to, or denies the allegations and the bank will pay $185 million in fines to various government agencies to settle the matter. Wells Fargo’s management has corrected the problem as much as possible by firing over 5,300 employees associated with the practices and by tightening the company’s monitoring controls. In a poll we conducted last week, 62.7% of 134 respondents felt that the fines weren’t enough, while 21.6% felt that they were appropriate, and 15.7% felt that they were too steep. Wells Fargo & Co (NYSE:WFC) is Warren Buffett‘s favorite banking stock, as his holding company Berkshire Hathaway owned around 480 million shares of it at the end of June.

Perhaps joining Wells Fargo on the settlement table is Deutsche Bank AG (USA) (NYSE:DB), which is rumored to be close to a settlement with U.S. regulators over cases concerning the previous misselling of mortgage-backed securities according to the German monthly magazine, Manager Magazin. According to the article, the bank might settle the cases for over $2.4 billion, a sum that, while large, would nonetheless be lower than analysts’ estimates of a $3.4 billion penalty. By settling, Deutsche Bank would remove some uncertainty around its stock and perhaps avoid some expensive lawyer fees. Of the 749 hedge funds that we track which filed 13F’s for the June quarter, 15 were long Deutsche Bank AG (USA) (NYSE:DB) at the end of June.

On the next page, we’ll examine the news that surrounded Bank of America, JPMorgan, and E*TRADE Financial last week.

Traders Uncertain About Direction of Interest Rate Related Equities in the Near-Term

Although modestly-higher interest rates would almost certainly help Bank of America Corp (NYSE:BAC), JPMorgan Chase & Co. (NYSE:JPM), and E*TRADE Financial Corp (NASDAQ:ETFC) make more in interest income, traders were a bit uncertain of whether the stocks would do well in the near-term last week. That uncertainty manifested in the poor price action on Bank of America and JPMorgan’s stocks on Friday, which fell by 0.69% and 0.91% respectively.

After initially rallying on what can be interpreted as hawkish comments from Boston Federal Reserve President Eric Rosengren, shares of the two banks fell due to the broader market weakness. Apparently the good news of potentially-higher interest rates sooner rather than later wasn’t enough to overcome the broader market panic on what higher interest rates might do to corporate buybacks and consumer buying activity in other sectors. The Dow and S&P 500 each fell by over 2% on Friday. If the broader market continues to fall, the three interest rate-sensitive stocks might not be able to remain in the green in the near-term, no matter how strong their relative strength might be.

In the long-term, however, many investors are confident about Bank of America, JPMorgan and E*Trade’s prospects, as companies that typically make more in EPS and return more capital back to shareholders will generally have higher share prices.

The hedge funds in our database added to their JPMorgan holdings on aggregate during the second quarter, as 99 of those funds owned $7.24 billion of JPMorgan Chase & Co. (NYSE:JPM) shares, which accounted for 3.20% of the float on June 30, versus 97 funds with $6.93 billion in JPMorgan shares on March 31.

Meanwhile, the smart money was less optimistic on Bank of America in the second quarter. 102 funds had a bullish position in Bank of America Corp (NYSE:BAC) at the end of June, down by eight funds from the end of March.

Last but not least, an esteemed fund became more bullish on E*Trade in the second quarter. According to SEC filings, Leon Cooperman‘s Omega Advisors raised its stake in the stock by 28% to slightly over 3.1 million shares of E*TRADE Financial Corp (NASDAQ:ETFC) during the quarter. Cooperman’s firm was one of 35 in our system long the stock on June 30.

Disclosure: None