Few companies make the billions as quietly as Wells Fargo does. The company has managed to sidestep much of the errors and negative front page publicity of its banking counterparts. Most recently several banks were accused of "window dressing" their balance sheets. Wells Fargo didn't make that list. Wells Fargo has shown caution towards the speculative carry trade which Goldman and Bank of America both actively participate in. The bank has operated a disciplined operation and as the TARP program was unveiled in 2008, Wells was the only bank opposed to taking money; they didn't need it (from Andrew Ross Sorkin's Too Big To Fail).
Warren Buffett has Wells Fargo as his second largest holding after Coke. He has nearly doubled his stake from 170 million shares in 2005 to 320 million this year. Wells presently trades for less than what it was in 2005, but had been paying close to a 4% dividend prior to the financial crisis. Buffet seldom comments on his minority stock holdings, but he did discuss Wells Fargo in the 1990 shareholder letter.
He described the company as a "superbly-managed, high-return banking operation" and also the only stock in which he raised his stakes that year. At the time Wells Fargo had $56 billion in assets and was earning a 20% return on equity (Wells Fargo has not eclipsed 20% in the past 10 years). Buffett cautioned against the highly leveraged nature of banks and how managerial weaknesses and strengths get magnified under such circumstances. Hence he had no inclination to purchase a bank with suspect management. The stock would justify his opinion. Shares of Wells Fargo went from about $2 in 1990 to $23 in 2000 (December, post bubble bursting).
Wells Fargo errs on the side of caution. In a recent conference call with investors management denied engaging in the "carry trade." The carry trade they were referring to was the borrowing of overnight fed funds rate (the rate the Fed targets, presently close to 0%) and lending at marginally higher rates to depositors. Wells is cautious of higher rates and if they were to materialize the carry trade position would be subject to losses.
Wells Fargo was profiled in Good To Great (2001), a book by Jim Collins about firms that have performed well over a number of years. Collins wrote that the company stood at a crossroads after deregulation. The bank knew it would not be able to compete on a global scale so it focused on the U.S. specifically the western part. Wells was also aware commercial banking would grow to be more commoditized. Their response was to focus on profit per employee rather than profit per loan. The profile explains their earlier success, but their recent success is no different.
Warren Buffett has Wells Fargo as his second largest holding after Coke. He has nearly doubled his stake from 170 million shares in 2005 to 320 million this year. Wells presently trades for less than what it was in 2005, but had been paying close to a 4% dividend prior to the financial crisis. Buffet seldom comments on his minority stock holdings, but he did discuss Wells Fargo in the 1990 shareholder letter.
He described the company as a "superbly-managed, high-return banking operation" and also the only stock in which he raised his stakes that year. At the time Wells Fargo had $56 billion in assets and was earning a 20% return on equity (Wells Fargo has not eclipsed 20% in the past 10 years). Buffett cautioned against the highly leveraged nature of banks and how managerial weaknesses and strengths get magnified under such circumstances. Hence he had no inclination to purchase a bank with suspect management. The stock would justify his opinion. Shares of Wells Fargo went from about $2 in 1990 to $23 in 2000 (December, post bubble bursting).
Wells Fargo errs on the side of caution. In a recent conference call with investors management denied engaging in the "carry trade." The carry trade they were referring to was the borrowing of overnight fed funds rate (the rate the Fed targets, presently close to 0%) and lending at marginally higher rates to depositors. Wells is cautious of higher rates and if they were to materialize the carry trade position would be subject to losses.
Wells Fargo was profiled in Good To Great (2001), a book by Jim Collins about firms that have performed well over a number of years. Collins wrote that the company stood at a crossroads after deregulation. The bank knew it would not be able to compete on a global scale so it focused on the U.S. specifically the western part. Wells was also aware commercial banking would grow to be more commoditized. Their response was to focus on profit per employee rather than profit per loan. The profile explains their earlier success, but their recent success is no different.
The company has remained a U.S. only company. Unlike Citi and Bank of America which have both expanded internationally, Wells earns all its profits in the U.S. The company has expanded eastward with the purchase of Wachovia, but unlike Bank of America's purchase of Countrywide, this acquisition has shown to be quite successful.
Looking forward the prospects for Wells Fargo appear good. Banks continue to fail and the U.S. has shed several hundred over the last couple years. This ultimately bodes well for the remaining banks. Earnings per share estimates for 2011 are expected to skyrocket 74% to 2.88 from the trailing 12 months EPS of 1.66. Much of this growth should stem from the diminishing provision for loan losses. Wells is still writing off billions from its mortgages and the housing market still has yet to recover. However, the real estate bloodshed will not continue forever and as I noted on a previous post the unprecedented falloff in housing construction should put a ceiling on the inventory buildup sooner if not later.
Disclosure: Holding shares of Wells Fargo
Josh Zachariah
I greatly appreciate criticism and guidance for my articles.
Looking forward the prospects for Wells Fargo appear good. Banks continue to fail and the U.S. has shed several hundred over the last couple years. This ultimately bodes well for the remaining banks. Earnings per share estimates for 2011 are expected to skyrocket 74% to 2.88 from the trailing 12 months EPS of 1.66. Much of this growth should stem from the diminishing provision for loan losses. Wells is still writing off billions from its mortgages and the housing market still has yet to recover. However, the real estate bloodshed will not continue forever and as I noted on a previous post the unprecedented falloff in housing construction should put a ceiling on the inventory buildup sooner if not later.
Disclosure: Holding shares of Wells Fargo
Josh Zachariah
I greatly appreciate criticism and guidance for my articles.
