How strong is the economy? The weekly jobless claims chimed in at 201,000, the lowest level in 49 years. Yet Wells Fargo (NYSE:WFC) is laying off as many as 26,500 employees, not a great a piece of news if you own Wells Fargo stock.
Which begs the question: Is this Warren Buffett’s worst investment? Could it possibly be worse than IBM (NYSE:IBM)?
I think so. Here’s why.
Banks Should Be Job Creators
Never mind that the bank’s second-quarter results were miserable relatively speaking on both on the top- and bottom-line. According to CNBC:
“In the second quarter, Wells Fargo was the only major U.S. bank to report lower year-over-year revenue, and it had the worst efficiency ratio at 66.7 percent… The metric, followed by analysts and investors, measures how much expenses consume revenue, and the lower, the better. Competitors including J.P. Morgan were almost 10 percentage points better than Wells Fargo.”
When you have an economy as strong as the current one, shouldn’t banks be creating jobs, both internally and through loans to companies that are?
Absolutely.
So, what does CEO Tim Sloan do?
Fire up to 10% of the staff blaming it on digital banking. Meanwhile, JPMorgan Chase (NYSE:JPM) is creating jobs in new markets to grow its business for the long haul.
Although Wells Fargo has denied that it offered the top job to Gary Cohn, it probably should have because shrinking is not the solution to the bank’s problems.
Customers still don’t trust Wells Fargo no matter how many stagecoach ads it runs.
Numerous Options Besides Wells Fargo Stock
Earlier this year I wondered if Warren Buffett would ever pull the plug on Wells Fargo stock.
“It isn’t sad when a bank of any size gets caught with its hand in the cookie jar; that’s what bank regulators are paid to do. What’s sad is that investors are willing to give Wells Fargo a first, second and third chance to redeem itself,” I wrote. “Aren’t there any other banks in the U.S. worthy of investors’ capital? Of course, there are. I can think of several.”
The Oracle of Omaha’s given no indication he’s soured in any way on Wells Fargo stock.
“I see no reason why Wells Fargo as a company…going forward is in any way inferior to the other big banks with which it competes,” Buffett said during annual shareholders meeting in May. “We have a large unrealized gain [in the stock]. I like it as an investment.”
Well, Mr. Buffett, you’re someone who often references the 370,000 or so employees Berkshire Hathaway (NYSE:BRK.A, NYSE:BRK.B) has on the payroll. I wonder how shareholders would react to your stock if you announced you were cutting 10% of your workforce.
I would like to think they wouldn’t be pleased but greed has a way of altering people’s perceptions.
The fact is, Berkshire Hathaway owns the shares of three other banks in its top 15 holdings — Bank of America (NYSE:BAC), The Bank of New York Mellon (NYSE:BK), and U.S. Bancorp (NYSE:USB) — and I would argue that all three are better investments now and in the future.
And that’s just within Buffett’s own holdings. Outside of those, there are plenty of other better options including SIVB Financial (NASDAQ:SIVB).
But Buffett’s Worst Investment?
I’m not sure that you can ever classify an investment that’s generated $27 billion in unrealized gains along with billions more in dividends as a bad investment.
However, there comes a time when an investment outlives its usefulness. With almost $30 billion in Wells Fargo stock, Buffett could pay the tax on the gains and still have plenty to invest in Apple (NASDAQ:AAPL) or some other stock that will surely do better over the next 5-10 years.
With these latest job cuts, I fail to understand the attraction of Wells Fargo stock. I really do.
As of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
