By most objective measures, Western Alliance Bancorp (NYSE:WAL) stock appears significantly undervalued. However, investors need to start seriously thinking about dumping – or at least trimming – WAL stock. The narrative comes down to whether you believe the banking sector fallout represents a frontload or backload problem. I am bearish on Western Alliance.
Optimism vs. Pessimism
Technically speaking, it’s difficult not to feel jitters over WAL stock. At one point in March, shares found themselves up 29% on a year-to-date basis. However, just a few weeks later, they’re down 45%, a staggering loss of market value. Nevertheless, an argument also exists that the pessimism surrounding the stock is overblown. For instance, the stock rallied significantly off its lows.
Still, one of the major problems with the bullish contrarian narrative for WAL stock centers on the obvious point: publicly traded securities – especially those of banking firms – typically don’t suffer severe double-digit losses without reason. For all the talk about WAL’s latest rise, it’s important to remember that in the past month, it’s down 56%.
What’s worse, the decline is much more draconian than that experienced by WAL stock during the COVID-19 onslaught. For example, between February 20, 2020, and March 19, 2020, WAL dropped by as much as ~64%. However, from March 6 to March 13 of this year, it plunged about 90% before paring back some of the losses.
However, optimists might reason that because WAL stock fell severely before, it can rise up again. Maybe that’s true. Nevertheless, investors must remember that the U.S. government depleted considerable fiscal and monetary ammunition to bolster the financial ecosystem, and it probably can’t do it again.
WAL Stock Faces an Earthquake, Not an Aftershock
To be fair, many market observers noted that while the implosion of two major financial institutions earlier this month represents cause for concern, bank failures themselves are not uncommon. Since the end of 2008, the Federal Deposit Insurance Corp. (FDIC) noted that 513 banks collapsed. Seemingly, then, people shouldn’t worry about WAL stock.
However, most of these failures were frontloaded in 2009 and 2010 amid the Great Recession. In 2019, only four banks failed, representing a backloaded aftershock of the recession. In other words, the worst of the pain subsided. Notably, in 2021 and 2022, no banks failed.
Therefore, just the sight of two banks failing in the still-young 2023 indicates a radical paradigm shift (i.e., nothing to something). For the less-than-optimistic types, the implosions may be a sharp warning rather than a random tremor.
Again, it’s important to note that the U.S. government expended tremendous resources to foster economic stability immediately following COVID-19’s disruption. As a result, between February and May 2020, the real M2 money stock expanded by 16.9%.
Yes, the Fed implemented aggressive interest rate hikes to control inflation. Nevertheless, the money stock as of January 2023 is still up 18.7% from February 2020. Therefore, the Fed still has a long road ahead to contain inflation. That’s not great news for economic viability, which may impede WAL stock.
Western Alliance Only Appears Undervalued
Before anyone decides on a particular move for an investment, it’s critical to consider the other side. With WAL stock, TipRanks reporter Michelle Jones notes that shares trade at a price-earnings (P/E) ratio of around 2.9 times, indicating a possibly significantly undervalued profile. Objectively, she’s correct. Presently, WAL’s P/E ratio puts it well below the industry median PE of 8.74.
However, the problem is that Western Alliance tacked on considerable debt. As of the fourth quarter of 2022, the company carries $6.5 billion of long-term debt. In the year-ago quarter, it held only $1.67 billion. Heading into a period of possibly even more restrictive monetary policy, such an increase in debt is worrisome.
Also, while WAL stock trades at a projected (forward) earnings multiple of 3.27 (which is also significantly undervalued), the possible paradigm shift that occurred generates questions about this forecast. After all, it’s unlikely that analysts baked in a half-off erosion in WAL prior to this month.
Is WAL Stock a Buy, According to Analysts?
Turning to Wall Street, WAL stock has a Strong Buy consensus rating based on seven Buys, one Hold, and zero Sell ratings. The average WAL stock price target is $72.88, implying 124.7% upside potential.
The Takeaway: WAL Stock Stands on Shifting Ground
Although it’s tempting to consider WAL stock as an undervalued opportunity, sometimes, a deal is too good to be true. Technically, investors don’t stampede for the exits unless a very good reason to do so exists. Fundamentally, economic circumstances don’t bode well for the banking sector. Finally, on a financial note, the intake of debt in a rising interest rate environment raises questions.
