We’re making a Bullpen adjustment and upping 2 price targets. Plus, a bullish Wells update
Every weekday, the CNBC Investing Club with Jim Cramer releases the Homestretch — an actionable afternoon update, just in time for the last hour of trading on Wall Street. Stocks are higher for the fourth straight session, with the S & P 500 hitting a record high. The Nasdaq Composite is still about 2% off its record close on June 2. The artificial intelligence trade is back in full force following last Thursday’s blowup in a high-leveraged, AI-focused hedge fund. That development is looking more and more like the clearing event we thought it would. It signaled that much of the forced selling that had pressured chipmakers and other AI infrastructure stocks had finally run its course. The downward move in oil prices and Treasury yields the past few days are adding to the broader market’s gains as optimism grows that the U.S. and Iran will seek a diplomatic solution to reopen the Strait of Hormuz. We have two housekeeping updates. First, we are removing BWX Technologies from the Bullpen. We put this speculative stock on our watchlist of stocks bullpen back in April, fresh off a strong earnings report from Club name GE Vernova , which partners with BWX Technologies on the buildout of its BWRX-300 small modular reactors. We still think nuclear makes sense long term to provide data centers with round the clock access to clean energy, but the stock has been a poor performer and the beats and raises have only been modest. The second update is on CrowdStrike and Palo Alto Networks . These two cybersecurity companies are having a terrific few days. CrowdStrike is up 17% over the past four sessions, while Palo Alto Networks has jumped 14% and is on pace for a record close. The rallies coincide with more troubling signs pointing to an elevated threat environment, both from overseas adversaries and recent disclosures involving frontier AI models from Anthropic and OpenAI gaining unauthorized access to organizations’ systems during testing. The rise of Chinese open-weight models may create even more cybersecurity risks. This perfect storm of cyberthreats likely means that companies are engaging more than ever with these two best of breed cybersecurity providers. Both stocks have blown past our price targets, so we are raising CrowdStrike to $220 from $187.50 and Palo Alto Networks to $380 from $325. We’re feeling better about our Wells Fargo position after CEO Charlie Scharf joined Jim Cramer on “Squawk on the Street” for a wide-ranging interview earlier Tuesday. Scharf covered the bank’s turnaround progress, the stock’s underperformance to peers, and updates on two key financial metrics. Here’s a closer look at what Scharf had to say and why we’re more confident in Wells’ future. When pressed by Jim about Wells’ lagging share price since its asset cap was removed last year, Scharf dismissed concerns, and said to look at the performance over a longer period. He cited the roughly 191% advance since the start of 2021. (Scharf’s got a point. We ran the numbers, and Wells has outperformed Citigroup, JPMorgan and Bank of America over the period.) “Ultimately what’s going to matter is our performance,” Scharf added. “When you look at our results, our earnings per share [is] up 25%. We have revenue growth really strong. … Expenses really controlled. We’re growing loans. We’re growing deposits. We’re growing bankers. We’re growing traders. We’re taking market share in investment banking. … Over a period of time, those are the things that drive the stock price.” It’s great to hear about growth in so many key businesses. Investment banking has been an especially exciting prospect because it diversifies Wells’ bottom line so the firm doesn’t rely so heavily on interest-based revenues that are at the mercy of the Federal Reserve’s rate decisions and the yield curve. Plus, management has made big bets on dealmaking after poaching top bankers. Returns on those investments matter. Scharf also pushed back on any skepticism about Wells hitting its 17% to 18% target for return on tangible common equity (ROTCE), a key profitability and efficiency measurement used by Wall Street to judge banks. “We have a high degree of confidence that we’re going to get to 17% to 18%. And then when we get to 17%, 18%, we’re going to raise it because the mix of our business supports it. But what I don’t want to do is put a specific date on it because there’s so much out of our control. This is like asking the Fed what they’re going to do with rates six months from now when they just don’t know.” ROTCE is crucial because it’s a key way Wells has measured the progress of Scharf’s turnaround plan and how the bank performance stacks up against peers. Higher ROTCE shows that the bank is making more money for every dollar of actual, hard-money capital it holds. It also reflects strong underwriting, keeping costs under control, and more efficient deployment of capital — all of which Wells struggled with before Scharf took over in 2019 when its reputation was stained by a fake account scandal. Finally, Scharf said the bank is focused on improving net interest margin (NIM) — another key metric to evaluate banks — after it came in short of expectations last quarter. He added that the NIM figure has been distorted as Wells has invested further into higher-growth areas like capital markets now that its asset cap is gone. “What we’re focused on is growing revenues at the company over a sustainable period of time and growing returns. NIM is more of a byproduct of that, and the fact is we’ve been so constrained for so long. We were able to go add a bunch of assets in our markets business, which has lower NIM, but still has very high returns and will bring additional business. That’s not going to go on forever. We understand the world is concerned about NIM. That’s something we’re going to be very focused on. But our laser focus has been since we got to the company, creating an entity which grows faster and has higher returns. And that’s what we delivered.” We care about NIM because it tracks the gap between what Wells makes on its interest-bearing assets (loans) to what it pays out on its liabilities (customer deposits). That’s important for a bank like Wells that makes so much of its money from interest-based incomes. In short, we left the interview more confident in the plan Scharf has for the bank now that it’s no longer constrained by the asset cap. Companies reporting after the close include Advanced Micro Devices , SpaceX , Arista Networks , Astera Labs , Booking Holdings , Amgen , Toast , and Wynn Resorts . Before the opening bell on Wednesday, we’ll see earnings from Club name Eli Lilly , along with Uber , Shopify , Disney , Circle Internet Group , Carlyle Group , CVS Health , and GlobalFoundries . On the data side, we’ll see the ADP monthly private payrolls report, the S & P Global U.S. Services PMI, and the ISM Services Index. (See here for a full list of the stocks in Jim Cramer’s Charitable Trust.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. 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