WFC is just plain cheap.

music selection:  “Girlfriend Is Better” — Talking Heads

Shares of Wells Fargo (WFC) are trading around a five year low.  The company has taken it on the chin for internal scandals that it is still recovering from.  From my view, the worst case scenario is already priced in and shares offer a great value from here.

There are a few catalysts that could send the stock higher.  Foremost is the search for a new CEO (the old one stepped down in March after a four hour long brow beating from Congress).  The company is having a hard time finding someone who will take the job.  It is a sure bet they won’t pick someone controversial who will send the stock lower.  They are going to make a safe and conservative pick that signals stability and integrity to the market.  Next up is the inverted yield curve.  Net interest income has risen consistently since 2013 but will decline for the first time in recent history this year.  The yield curve rarely goes steeply negative so we are probably near the nadir.  A steepening yield curve will pad the bottom line.

WFC is also currently prohibited from growing its asset base.  So its fat Free Cash Flow is being returned to shareholders through distributions and buybacks.  If the prohibition stays in place, shareholders are rewarded.  If it is removed, the company becomes a growth story.  For lots of rational reasons, the stock is set to rise.

I want to look at pricing though as what you pay is the most important part of making a good value investment.  Price to Earnings (P/E) is a mere 10.7 which is a five year low.  Similarly, Price to Book (P/B) is only 1.2, another five year low.  Despite this low pricing, the Return on Equity (ROE) is an impressive 12.2%.  And remember, right now they are obligated to return that excess to shareholders lest they run afoul of regulators.  The valuation really shines on Price to Sales (P/S) which is the lowest among its peers at at about 2.0.  The company merely has to get back to historical valuation levels to soar.  And we get paid 4.06% annually in distributions for a trouble while we wait.  At the same time, the company is buying back stock, driving up the stock price and making it easier to raise the distribution.

I probably won’t be taking a position at this time unless it is a deeply in the money bull call spread.  I’d do that with an offsetting deep in the money bear put spread on something challenged to make the net change to the portfolio market neutral.  Ravenous lizards playing the “home game” who are still in the accumulation phase however, could do a lot worse than accumulating shares of WFC for the distribution, share holder yield in the form of forced buybacks, and great covered call earning potential.  Best of luck to anyone who takes the plunge.

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Wells Fargo is a Great Value Stock Right Now

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2 thoughts on “Wells Fargo is a Great Value Stock Right Now

  • June 16, 2019 at 3:16 am

    There is the matter of the 11.5 debt/equity ratio. Otherwise, I agree with you. I think this and GS are stocks to write puts on when the panic strikes.

    Banks will take a Mike Tyson punch to the chin when the trade wars and associated uncertainty / lack of investment hit their clients in agriculture, manufacturing, retail, and transportation. WFC’s 1.3 beta makes this a possibility for deployment of cash when we’re 20% down.

    And if they need a CEO, I guess I could do it, but they need to send a headhunter to talk to me.

  • June 17, 2019 at 5:06 pm

    I’ve been in JPM and I like it better because of the track record of Jamie Dimon’s leadership. WFC is cheaper by the numbers, but I think it’s cheaper because we just don’t know which way the company is going to go. JPM had been outperforming WFC even before the scandals and has obviously continued since then.

    Still, I’m tempted to open a small position in WFC for the reasons that you discussed. At this point, it’s priced for value and I think the fundamentals are still strong. The yield is 4% (vs. 3% with JPM), so in the event of a downturn, you get paid to wait. And adding a small position in WFC will diversify my holdings in that sector (PNFP, JPM). Finally, my home mortgage check is written to WFC each month, so if I own WFC, I’ll really just be paying myself.


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