Stock of the Week
NYSE Symbol: WFC
Price as of 10/15: $23.58
The stock market has performed great since the beginning of September. The Dow is up 10% in the last month and a half. The Nasdaq is up an astounding 17% in the same time period thanks in large part to Apple. The commodities have been another sec tor that has gone straight up. I wouldn't blame anyone for taking profits, but what to rotate into? One sector that has performed awful is the financial sector. Bank of America made a new 52 week low on Friday due to concerns of possibly halting housing foreclosures and the exposure and liability to improper securitization of certain mortgages. Bank of America, Citigroup, and JP Morgan have been the big three mentioned in this new liability concern. A number of analysts have come out and defended the big banks indicating that the numbers concerning the liabilities are outrageous. JP Morgan reiterated such comments on Wednesday after reporting earnings saying they don't see this issue becoming a big monetary problem. Other banks will report this next week hopefully reiterating the same comments including the featured stock of the week, Wells Fargo. In the short term the banks will remain under pressure, but long term investors are getting a great opportunity to invest in a sector that's on the mend and will boost their dividends significantly over the next several years.
Wells Fargo will not report earnings until Wednesday of next week, so many investors may want to wait and see the results first, but if JP Morgan is any example, things are on the mend. Last quarter Wells Fargo beat estimates by 7 cents making $2.8 billion. Revenues fell 4.9% year over year to $21.39 billion in line with estimates. Net charge-offs declined to $4.5 billion, down 16% from first quarter and down 17% from last year's peak quarter. Wells Fargo expects this positive trend will continue over the coming year. The significant reduction in credit losses confirmed Wells Fargo's prior outlook with credit quality improving earlier and to a greater extent than they previously expected. Their capital ratios continued to build rapidly, with Tier 1 common reaching 7.53% and Tier 1 capital at 10.42%, even with the purchase of $540 million of Wells Fargo warrants auctioned by the U.S. Treasury. Several consumer portfolios increased during the quarter, including auto dealer services and private student lending. Consumer portfolios are declining at a lower rate, including Wells Fargo Home Mortgage, credit card, and consumer lines and loans. On the commercial side, for the first time this year, they saw an increase in lending activity and line usage. So the good news is things are not great, but the fundamentals are slowly improving.
An analyst at Stifel made comments in September that Wells Fargo is their best idea heading into the third quarter earnings based on their book value per share growth, earnings growth, and return on assets. Oppenheimer reiterated a buy on Wells Fargo last month and this morning after the recent sell off. Currently Wells Fargo is trading for 8 times next years earnings, 1.4 times sales, and 1.1 times book value of $21.37 a share. The dividend is modest, but most banks will hike the dividend materially next year. Wells Fargo may make comments on the dividend when they report next week. Hopefully Wells Fargo, Bank of America, and Citigroup will ease fears next week about the mortgage halts and liabilities for these securitizations. Long term the financials are undervalued. Long term investors should consider the financial sector while other sectors get a little pricey in the short term.