There has been negative news on U.S. banks of late, in particular banks like Wells Fargo (WFC, Financial) whose success is tied to the stumbling economy. Wells, along with other commercial banks, are struggling to increase revenue even though earnings continue to grow on account of the release of loan loss provisions. John Stumpf of Wells Fargo noted that credit risks in their mortgage portfolio are improving and the number of delinquent mortgagors is declining. But with the negative outlook on Wells and other commercial banks investors are pushing down bank stocks to exceptionally low levels.
As the chart above notes, Warren Buffett had made purchases of Wells in the ranges of $23-$28 in 2010. It is currently trading close to book value or at a 10% premium if you’re not using the trailing 12 months measure. Prem Watsa had commented in a speech at Columbia University that when Wells Fargo was trading 1x book value in 2009 that it was an incredible deal considering the caliber of the bank. Below is the growth in book value for Wells over the past 10 years.
Problems remain in the mortgage market and house prices do remain stagnant. The long-term economics of Wells are particularly sound and the bank has been growing book value through the recession and over periods of time at an impressive rate. Looking beyond book value, the bank is also trading at a P/E of 10.5 and is expected to have higher earnings this year on account of further releases of loan losses. When top line growth will come is yet to be seen, but for those patient for that the stock should prove a good deal.
Disclosure: Long WFC
Josh Zachariah
As the chart above notes, Warren Buffett had made purchases of Wells in the ranges of $23-$28 in 2010. It is currently trading close to book value or at a 10% premium if you’re not using the trailing 12 months measure. Prem Watsa had commented in a speech at Columbia University that when Wells Fargo was trading 1x book value in 2009 that it was an incredible deal considering the caliber of the bank. Below is the growth in book value for Wells over the past 10 years.
Problems remain in the mortgage market and house prices do remain stagnant. The long-term economics of Wells are particularly sound and the bank has been growing book value through the recession and over periods of time at an impressive rate. Looking beyond book value, the bank is also trading at a P/E of 10.5 and is expected to have higher earnings this year on account of further releases of loan losses. When top line growth will come is yet to be seen, but for those patient for that the stock should prove a good deal.
Disclosure: Long WFC
Josh Zachariah
