It’s been two weeks since I wrote that Wells Fargo (NYSE:WFC) stock was way too cheap. At the time, it was trading at 80% of its book value. But now it has risen from $26.47 to $33.32, almost 26%. I suspected then that WFC stock should be higher than its book value per share of $32.09. Monday’s 5.21% jump solved that.
I still think it is worth at least $37 per share. In fact, if there are no more significant write-downs, Wells Fargo will probably move up to at least 1.5 times its book value per share.
That gives Wells Fargo stock a target price of $48.14 per share. This would be a normal valuation of a stock that is under some severe stress.I don’t think that will be the long-term case for Wells Fargo. So, I suspect that the stock has an upside of at least 44%.
What Analysts Say About Wells Fargo Stock
My May 29 article coincided with a Barron’s report on a D.A. Davidson analyst who initiated coverage on Wells Fargo. The stock was at $27 and the money manager decided to tell their clients that their recommendation was “neutral” on its prospects.
Cut to two weeks later and the stock is up 20%. That is typical of Wall Street analysts. They look back at the recent moves of the stock and think that will keep on occurring. Or, they are too conservative. That is the case here.
On the other hand, Barron’s noted on June 4, that a Deutsche Bank analyst boosted his rating to “buy.” The weekly said this was bucking the trend, adding that only six of the 31 analysts covering Wells Fargo stock had a “buy” rating on the shares.
Being a Contrarian
So I guess you have to be a contrarian to buy this stock. But that is always the way it is with Wall Street analysts. Just watch. After the stock goes up another 50% they will all be in the “buy” camp. In other words, they are trend followers, not contrarians.
But, of course, the money is in being contrarian. Sir John Templeton once wrote that unless you act differently from the crowd, you will never get a different result … or some words to that effect.
The money is in buying a reasonably healthy company at or below its book value and selling it at greater than book value. This is how one should normally buy financial stocks, especially in a short-lived recession like we are going through now.
Up to and Slightly Over Book Value
The book value per share may actually be lower in the second quarter, so buying Wells Fargo stock is probably, in reality, buying it above book value. Of course, when I say book value, I am referring to tangible book value. Tangible book value per share deducts goodwill and other intangible assets from the company’s shareholders’ equity.
So, I would buy the stock up to about 1.25x book value. This is because the stock is likely, in good times, when all the Wall Street analysts are saying “buy,” to trade up to 2.5 times its book value. Of course, that is when you sell.
If you follow this advice patiently, you are bound to make money with Wells Fargo over the long term. Be a contrarian with this stock. It’s time to buy now.
Bloomberg Businessweek is now out with a story on a young billionaire who put all his money in two stocks. (Wait for it …) That’s right, he bought Wells Fargo stock and Apple (NASDAQ:AAPL) with the $3.35 billion from the sale of his startup.
This guy, Ryan Cohen, sold his co-founding ownership stake in Chewy (NYSE:CHWY) in 2017 before it was public. He put it all in just WFC and AAPL shares and has stuck with them ever since. He did exactly what everyone told him not to do. You will find his contrarian attitude very interesting and inspiring.
As of this writing, Mark Hake, CFA does not hold a position in any of the aforementioned securities. Mark Hake runs the Total Yield Value Guide which you can review here.
