3 of our stocks are in the news — here's our take on what's happening

Published Wed, Sep 21 20224:34 PM EDT

Kevin Stankiewicz @in/kevin-stankiewicz-b5593466 @kevin_stank

The Federal Reserve was the star of Wednesday's show for investors, but there were some noteworthy company-specific developments involving Club holdings. Here's a recap of three headlines and how we're thinking about them. Wells Fargo The news: In prepared testimony to Congress, Wells Fargo (WFC) CEO Charlie Scharf said the bank still has plenty of work to complete before it fully addresses the risk and control concerns of U.S. regulators. "While we have made progress in strengthening our risk and control infrastructure, we still have several years of work to do to meet our own high expectations for risk management and [that of] our regulators," Scharf said in remarks to the House Committee on Financial Services. "We have outstanding litigation, regulatory matters, and customer remediations to resolve, and until our broad book of risk, control and regulatory work is complete, we remain at risk for setbacks." Financial regulators have terminated some of the consent orders imposed on Wells Fargo in response to a series of scandals involving fake retail accounts and risk management systems. However, the San Francisco-based bank is still operating under a Fed-mandated asset cap. Under that February 2018 cap order , Wells Fargo must keep its assets below $1.95 trillion, which, in practice, limits the bank's ability to issue new loans and make certain investments in existing businesses. Fed Chairman Jerome Powell has said the asset cap will remain in effect until the bank addresses its remaining irregularities. Scharf, who took over the troubled lender in October 2019, said in his congressional testimony Wednesday that Wells Fargo has "approximately $1.9 trillion in assets." The Club take: Our investment thesis in Wells Fargo largely rests on a two-pronged approach to boost earnings. The first is a multiyear expense-reduction program that management laid out in early 2021; progress appears to be continuing on that front, even as inflation pressures labor costs. The second is rising interest rates, which are advantageous to a bank with such a large deposit base. As rates rise, Wells Fargo can make more money on the spread between what it pays customers for deposits and what it charges for loans. Still, intensifying recession fears have ultimately been a drag on Wells Fargo shares this year. At a high level, of course, we'd like to see the bank put its regulatory constraints in the rearview mirror. Investors must be realists, though, and our stake in Wells Fargo never assumed it would be a quick fix. Scharf's remarks serve as a reminder. Management has been careful not to set a concrete date for when it expects the Fed to lift its asset cap. Instead, management has repeatedly stressed that its top priority is building out a robust risk and control infrastructure in order to transform the bank from its checkered past. Cisco Systems The news: Barclays analysts downgraded Cisco Systems (CSCO) to the equivalent of a hold rating from a buy, while cutting their price target to $46 per share from $56, a nearly 18% reduction. "We had been positive on both market share gains in the Cloud vertical and the move to software. Both seem to have stalled. We are also more concerned about a macro slowdown in 2023, which would likely impact CSCO more than peers," the analysts wrote in a note to clients, in which they also upgraded Arista Networks (ANET) to an equivalent of a buy rating. Arista and Cisco compete on network switches. On the macro front, Barclays analysts said their research points to "decelerating enterprise spend across several verticals." The analysts argued that Cisco, with its roughly $52 billion revenue base in fiscal 2022, is likely to have more trouble avoiding the effects of a widespread economic slowdown than its smaller competitors. "The service provider vertical could also slow after strong 5G and fiber related spend in 2021. A declining industry growth rate and share loss could be a double whammy for CSCO heading into 2023," Barclays analysts wrote. The Club take: We do not entirely discredit the idea that companies like Arista could be taking market share from Cisco, which is a Dow stock. In fact, we suggested it was a possibility in early August, when we trimmed our Cisco holdings and downgraded the stock to a 2 rating. But we're not as concerned about Cisco's market position right now as Barclays seems to be. "Business as usual," Jim Cramer said on Wednesday's "Morning Meeting" in response to the downgrade. The easing of supply chain pressures is a key reason why we're more favorable on Cisco. The company saw improvements across its snarled supply chain from May through July, which c ontributed to its better-than-expected results . But the supply challenges Cisco has faced in manufacturing and shipping its hardware -- products like power supplies and routers have borne the brunt of disruptions -- could have had a knock-on effect on related software. And that dynamic could indirectly explain some of the slowing software growth that has worried Barclays. Management believes it can grow revenue in fiscal year 2023 between 4% and 6%, compared with 3.5% year-over-year growth in 2022. In issuing that guidance last month, Cisco said it felt confident in future sales due to its more than $31 billion in remaining performance obligations (RPO) and record product backlog. (Note: The company's RPO represents deferred revenue plus unbilled revenue from noncancelable contracts. A company's RPO can offer insight into future revenue, so investors pay attention to its direction.) AbbVie The news: JPMorgan analysts reiterated their overweight (buy) rating on AbbVie (ABBV) and doubled down on the biopharmaceutical company as one of their "favorite large cap ideas." The bank has a $180 price target on the stock, representing 27% upside from its Tuesday close at $141.77 per share. The analysts acknowledged that AbbVie shares have been weighed down given the company's best-selling drug, Humira, is set to lose exclusivity in the U.S. next year. Investors want more clarity on the potential financial impact of that that development. The good news, JPMorgan analysts noted, is that hurdle is right around the corner. "We see an attractive setup up for shares from here with further clarity on bHumira dynamics expected over the next few qtrs. And ABBV trading at ~12x our trough 2023 EPS despite a healthy growth outlook for the company beyond 2023," the analysts wrote. bHumira references so-called biosimilar Humira. Amgen (AMGN) is set to bring to market the first biosimilar for the arthritis drug in late January, roughly five months before others are expected. A biosimilar is a medicine that delivers the same clinical benefit as an existing FDA-approved biologic product, which include vaccines and monoclonal antibodies. Humira is a monoclonal antibody. JPMorgan expects a roughly 45% decline in U.S. Humira sales in 2023, "partially offset by health growth elsewhere in the portfolio," the analysts wrote. By 2024, they expect the growth of drugs like Skyrizi and Rinvoq to more than outweigh additional declines in Humira sales. AbbVie is likely to release third-quarter results in early November. The Club take: We've written before that Humira's loss of exclusivity is the dark cloud hanging over AbbVie's stock. Still, shares have gained more than 5% year-to-date in a brutal environment for the overall market. While the outperformance reflects investors' desire for defensive names with growing dividend payments, we think it also speaks to a belief in AbbVie's entire portfolio. First and foremost, we're talking about Skyrizi, which can be used to treat plaque psoriasis, and Rinvoq, a rheumatoid arthritis treatment specifically meant to be used when other anti-inflammation drugs known as TNF inhibitors prove ineffective. These two drugs are the current and future growth engines for AbbVie, and we fully agree with JPMorgan that uptake for these treatments is quite strong. We also agree that once the market receives clarity on when earnings will bottom out due to the Humira situation, investors will breath a sigh of relief, if the long-term outlook remains intact. That could translate into a higher multiple for the stock. Management has previously mentioned it expects AbbVie to grow its earnings at a high-single-digit clip in 2025 and beyond, with the lowest loss-of-exclusivity exposure in the industry during the second half of the decade. (Jim Cramer's Charitable Trust is long CSCO, ABBV and WFC. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.

Charles Scharf, chief executive officer of Wells Fargo & Co., waits to begin a House Financial Services Committee hearing in Washington, D.C., U.S., on Tuesday, March 10, 2020.

Andrew Harrer | Bloomberg | Getty Images