Berkshire Hathaway’s (NYSE:BRK.B, NYSE:BRK.A) Warren Buffett has gotten a lesson in the importance of integrity with his investment in Wells Fargo & Co (NYSE:WFC). He is currently the bank’s biggest shareholder, with over 440 million shares of WFC stock.
Buffett once remarked: “Somebody once said that in looking for people to hire, you look for three qualities: integrity, intelligence, and energy. And if you don’t have the first, the other two will kill you.”
That was yet another great pearl of wisdom.
Of course, Wells Fargo stock has been a albatross during the past few years. Since the summer of 2015, the price of WFC stock has gone from about $58 to $48.
At the heart of the struggles of WFC stock has been the terrible scandal regarding the opening of a whopping 3.5 million unauthorized checking and credit card accounts by WFC employees. The scandal was primarily the result of the company’s aggressive sales quotas, which were instituted in an effort to pump up the bank’s growth numbers. What started as a cross-selling program turned into an egregious violation of customers’ rights.
Keep in mind that investigations unearthed other disturbing practices by WFC. For example, the company’s mortgage fees were higher than permitted, and it engaged in hard-sell tactics when it came to pushing auto and pet insurance policies.
Given all of these negative revelations, it should be no surprise that WFC stock has been a loser.
WFC Stock and New Leadership
Tim Sloan, who took the helm of WFC as CEO in 2016, tried to manage the bank’s problems, but they proved to be too challenging for him. Last week, he abruptly stepped down and interestingly enough, WFC did not have a succession plan in place. Note that C. Allen Parker — WFC’s general counsel — is now the bank’s interim CEO. Sloan’s departure came after a contentious Congressional hearing that featured anger from both Democratic and Republican lawmakers.
According to the press release announcing Sloan’s departure,, he said: “However, it has become apparent to me that our ability to successfully move Wells Fargo forward from here will benefit from a new CEO and fresh perspectives.”
That is definitely true, especially since Sloan was a senior executive when the nefarious practices occurred. It’s actually inexplicable that he remained CEO as long as he did.
As of now, WFC is embroiled in a myriad of lawsuits and government investigations. But perhaps the most damaging action has come from the Federal Reserve. Last year it imposed an asset cap, which is supposed to prevent WFC’s total assets from growing beyond $1.95 trillion.
The consensus view on Wall Street was that the asset cap would only be in place for a very short time. But unfortunately, it may instead last throughout this year and maybe longer. The fact is that the Federal Reserve is far from satisfied with the remedial actions of WFC so far.
With the asset cap, it will be extremely tough for WFC to grow its revenues and earnings. No doubt, as a result of this situation, it will be difficult for WFC stock to get traction.
The Bottom Line on WFC Stock
The departure of Sloan is encouraging. There are certainly many talented executives at banks like Bank of America (NYSE:BAC), Citigroup (NYSE:C) and JPMorgan (NYSE:JPM) who can succeed as Wells’ CEO.
Yet the process of hiring a new CEO will likely delay WFC’s efforts to restructure its operations. In the meantime, WFC will continue to lose ground in terms of bolstering its business,as its ability to invest in areas such as new digital technologies and expansion into new markets will be limited. And even after a new CEO is brought on board, WFC will undergo a transition period.
Granted, WFC stock is trading at a reasonable valuation, as its forward price–earnings ratio is only about 8.6, while its dividend yield is a respectable 3.7%.
But such factors will mostly just limit the coming declines of WFC stock As for returning to growth, that may not happen for a few years.
Tom Taulli is the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
