Today’s target security Wells Fargo & Company (WFC).
music selection: “After The Rain” — Nelson (Oh yes, I did!)
weigh-in: 27JUL15 – 230.2# (2.4)
Wells Fargo is a Warren Buffet choice that is probably the strongest and safest of the US banks. (Canadian banks are probably on the whole even safer due to sane regulations that aren’t a case of the fox watching the hen house.) It is also cheap compared to its historical multiple of 2.5 to book value (it trades for roughly 2.0x today.) I’m going to set a buy up to target of $65 per share on WFC. Any price below that is a good price to either accumulate shares or write cash secured puts.
Assets, book value, trailing P/E and dividends are all increasing at a steady clip for WFC. The secret sauce that makes this bank so appealing is that it is the long time champion for lowest cost of deposits. This leads to higher than average net interest margins on lending. The opportunity lies with the US Federal Reserve. You see, it is widely believed to be just a matter of time before the Fed raises the federal funds rate. Many argue later this year will be the first such raise. Banks earn fatter margins when interest rates are high than when they are in the cellar. WFC is poised to go from profitable to super-profitable. And, like I mentioned earlier, it is cheap – trading below historical multiples.
The trade recommendation for today is to sell cash secured puts on WFC150904P00057500 for about 1.25. That provides a trade that will be open for 40 days and an annualized return of 19.84% (tasty!) That also provides a couple percent of downside protection against the spot price of 57.51. If assigned, we will rejoice in the 2.7% (and growing) dividend versus our net purchase cost. We will also write covered calls, about 6 weeks out and about 10% out of the money until called or until WFC reaches its historical 2.5 multiple to book value. We will then write our puts at the money, looking to earn 12% or better annualized returns until called. A win-win proposition.
Devour your prey raptors!