Wells Fargo & Co (WFC) stock has been rolling along faster than a stagecoach in its iconic logo. WFC is selling near its 52-week high of $54.60. Wells Fargo stock has steadily climbed this year from just over $44 a share to carve out a nice 20% gain.
As one of the “Big Four” U.S. banks, Wells Fargo is considered the most Main Street. That’s simply a way of saying that the bank’s known for its mortgage business and easy-to-relate to things like car loans — mundane stuff consumers can understand.
Indeed, Wells Fargo is known as a consumer-friendly, household bank.
But the bank also has a strong and growing investment banking division, although investors are more likely to think of the other Big Four Banks, Citigroup Inc (C), JPMorgan Chase & Co (JPM) or Bank of America Corp (BAC) as mainstays in the underwriting and trading business. Yet Wells Fargo quietly has edged up in the top 10 on the income list for investment banking.
Wells Fargo: A Buffett Bank
One of the most widely noted things about Wells Fargo stock is that it’s a “Buffett stock.” While billionaire Warren Buffett holds a number of banks in his Berkshire Hathaway Inc (BRK.B) company, he has a 463 million share stake in the WFC stock.
What Buffett likes about banks is well known to Buffett-ologists. Banks, apart from the Great Recession debacle, have a stable business model that deals with essential financial products such as mortgages, consumer loans, small business loans or other commercial loans. Banks are able to charge fees for services and have been profitable even in these low interest rate-spread times.
Wells Fargo: Results
In October, Wells Fargo reported solid third quarter results. Revenue was up 4% from the third quarter in 2013, to $21.2 billion. Diluted earnings per share increased 3% to $1.02. Net income also rose by 3%, to $5.7 billion. Key banking measures such as non-performing loans, net charge-offs, and provisions for loan losses were lower.
That’s all good news; also a positive is that loan volume and deposits were up. The net interest margin was squeezed a bit, down to 3.06% from 3.39% in the year ago quarter, but is still in good range.
Wells Fargo: A Look Ahead
Wells Fargo is a well run bank — again, that’s a major reason Buffett is so heavily invested in it — as it continues to excel in the basics of what many would feel is a basic business itself of banking.
Yet the shadow of the 2008-2009 banking crisis remains in many investors’ minds, as well as regulators’ minds. Wells Fargo has healthy capital reserve ratios, which should ease investor worries. Wells Fargo stock has continued to benefit as the bank briskly moved its business ahead.
The slowly improving U.S. economy, which may even bring an eventual mild interest rate hike, should nudge the bank’s business up yet again. Net interest margins should find a bit of relief then.
The main business of lending, though, should find an even better environment as the economy gets better. If interest rates go up even slightly — and they are expected to rise gradually — this should be gentle enough to keep loan demand and repayments going well.
With business prospects on the rise, Wells Fargo as a well-managed bank should see loan quality hold steady or firm up as well.
The main problems for long term investors in WFC stock are twofold. One, the stock market right now may be pricey. The S&P 500’s run-up might just be sending a signal that many stocks are fully priced, some priced for perfection. Wells Fargo stock, however, is still trading at a fairly reasonable valuation, about 13 times current earnings. It pays a respectable 2.6% dividend.
Still, after all, WFC stock is a bank stock, so it can’t be expected to grow at a torrid pace. Wells Fargo stock isn’t going to keep getting rewarded with record prices indefinitely, even as its business edges ahead nicely but only modestly. So investors shouldn’t jump in here, but wait until there’s a market correction or a pullback in WFC’s share price.
Then they can snap up the obvious value in Wells Fargo stock.
As of this writing, Greg Sushinsky did not hold a position in any of the aforementioned securities.