After a relatively quiet period when the largest banks in the United States stayed out of the press and were allowed to refocus on running their operations, new allegations arose to suggest that many in the industry were negligent in handling the process for foreclosing on residential houses.
About as quickly as bureaucrats started pointing fingers at the big banks, many of which also serve as the largest mortgageprocessors in the country, the underlying management teams caved to the politicians and announced immediate freezes on their foreclosure processes, pending further investigation.
One bank, however, stuck to its guns by stating that "we should keep in mind that a deposition does not suggest a wrongful foreclosure" and said it was sticking to business as usual as it planned to move forward in processing its foreclosures.
This may seem like a minor example, but there are many instances in which Wells Fargo (NYSE: WFC) has stuck with its principles and done what it thought was best for business, even if it stood in stark contrast to what the rest of the industry was doing.
An even clearer indication of this philosophy was when management boldly and decisively snapped up Wachovia Bank on the cheap at the height of the credit crisis. Wachovia was about to succumb to an overwhelming amount of toxic assets on its balance sheet and be snapped up by Citigroup (NYSE: C), with the backing of the government -- in case losses came in way higher than expected.
The Wells team, knowing an opportunity when it arose, countered with a $15 billion bid that was more than seven times what Citigroup was willing to offer. The bid was also superior in that Wells said it would shoulder all potential losses without the backing of Uncle Sam. The aggressive maneuver worked, and Wachovia was folded into Wells Fargo shortly thereafter.
Wachovia gave Wells Fargo a footprint on the eastern part of the United States, and complements its western dominance quite well. Wells now boasts more than 70 million customers, or one in three Americans. In another unconventional manner compared to the industry, it refers to its banks as stores, and now has more than 6,000 in the country with which to cater to its customer base and cross-sell a wide array of financial services, be it traditional banking, asset management services or life insurance.
Being bold when others are fearful has and will continue to serve Wells Fargo well. It is also a primary reason that Warren Buffett, who obviously embraces a similar philosophy, is the bank's largest shareholder. A seal of approval from a man who can certainly distinguish quality management teams from subpar ones is also a noteworthy distinction.
Action to Take ---> The latest round of mortgage accusations has sent shares of Wells Fargo further into the bargain bin. I believe the shares could be worth about +75% more than its current price within the next few years.
This is based off a couple of assumptions. The first is that loan loss reserves will prove excessive and boostearnings as they are eventually reversed off the balance sheet.
Secondly, I peg normalized earnings at more than $3 per share, which is based primarily on Wells returning to reporting a mid-teens level of return on equity (ROE). Applying a mid-teens earnings multiple, which is right at about historical averages, leads to a stock price close to $40 per share, or about +75% above where the shares are trading currently.
A high-caliber management team that has the courage to do what is right for shareholders is an added bonus and makes me confident that Wells can easily ride out any future industry headwinds. More importantly, it should continue outperform the industry and has big upside as Wachovia is completely integrated into the corporate culture.
-- Ryan Fuhrmann
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A graduate of the University of Wisconsin and the University of Texas, Ryan Fuhrmann, CFA, adheres to a value-based investing viewpoint that successful companies... Read more...
This article originally appeared on StreetAuthority