Wells Fargo gets a major buy recommendation for many of the same reasons that we own the stock

Published Mon, Oct 3 20224:05 PM EDTUpdated Mon, Oct 3 20224:14 PM EDT

Ahead of the start of earnings season next week, Wells Fargo (WFC) got a major endorsement on Wall Street. Goldman Sachs in a research note Monday called the Club holding an "underappreciated earnings growth story," upgrading the stock to a buy rating based on many of the same reasons we own it. Shares of Wells Fargo more than rose 3% in Monday's relief rally, which started the new month out on a strong note after September's terrible market. Investors were more focused on falling bond yields, which took some pressure off stocks, rather than the financial concerns of Swiss bank Credit Suisse. "I do not think this is a Lehman moment," Mohamed El-Erian, chief economic adviser to Allianz, told CNBC on Monday, when asked about possible comparisons to the fall of U.S.-based Lehman Brothers in 2008, which kicked off the financial crisis. During Monday's "Morning Meeting" for Club members, Jim Cramer said Wells Fargo is well positioned among banks stocks because it doesn't have that much exposure to the capital markets like Credit Suisse does. "If you just joined the Club, I would buy the stock" in Wells Fargo, he added. We favor Wells Fargo as a more traditional bank that can benefit in a rising interest rate environment by earning more on the spread between the loan rates it charges and the smaller interest it pays to savings account holders, also known as net interest income. What Goldman's says With that dynamic in mind, Goldman Sachs upgraded Wells Fargo to a buy from a hold-equivalent and raised its price target to $48 per share from $46. That represents just over 19% upside over the next 12 months based on Friday's close. Goldman analysts cited Wells Fargo as "best in class" for its potential to increase revenue driven by net interest income as a result from higher interest rates. They expect a 38% increase in the banks' net interest income growth compared to 30% for the group average. They see less credit risk potential in a recession scenario when compared to peers due to lower loan growth, less credit card skew and more excess capital. Specifically, Goldman said with loan balances down 3% versus 12% growth for peers, Wells is less susceptible to credit losses, which benefits the bank in a downturn. Goldman also sees a 14% earnings-per-share upside if the Federal Reserve-mandated asset cap were to be removed. There's no way to tell when that might happen. In 2018, Wells Fargo was ordered to keep assets below $1.95 trillion until it cleaned up its act after a series of sales practice scandals. The Club's take Wells Fargo has been our favorite bank stock this year because its large asset base positions it to benefit from rising rates. While total revenue fell 16% to $17.03 billion in the second quarter , the bank's net interest income rose 16% year-over-year to $10.2 billion. On the expense side, Wells Fargo is still in the early days of a multiyear restructuring program that should lead to year-over-year declines in expenses. Wells Fargo's non-interest expenses dropped 3% last quarter while other banks have struggled to manage rising costs. Capital returns are also a big piece of our investment thesis in the bank, and the amount of excess capital on Wells Fargo's books positions them for plenty of buybacks and dividends in the future. The bank has increased its dividend payout twice in 2022. To be sure, Wells Fargo shares have declined with the broader market in 2022. However, year-to-date, the stock has only lost about 13.7% versus the S & P 500 's more than 22% drop. Also by comparison, shares of Club holding Morgan Stanley (MS) have dropped about 18% for the year. Last week , Jim spoke with Morgan Stanley CEO James Gorman who said he's not concerned about his company's stock price. Neither are we. We like Morgan Stanley for its diverse revenue strategy, share repurchase program and quarterly dividend. Wells Fargo and Morgan Stanley kick-off earnings season on Oct. 14, along with JPMorgan (JPM) and Citigroup (C). (Jim Cramer's Charitable Trust is long WFC and MS. 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.

Pedestrians pass a Wells Fargo bank branch in New York, U.S., on Thursday, Jan. 13, 2022.

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