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The Science of Hitting
The Science of Hitting
Articles (672) 

Why I (Almost) Sold Wells Fargo

Some thoughts on the bank and its most important shareholder.

In February 2020, during an appearance on CNBC, Warren Buffett (Trades, Portfolio) (NYSE:BRK.A)(NYSE:BRK.B) discussed his investment in banks, most notably Bank of America (NYSE:BAC) and Wells Fargo (NYSE:WFC). For some background, Buffett had increased his investment in Bank of America over the past few years (starting with the 700 million shares acquired via warrants in 2017); on the other hand, he has been paring back his stake in Wells Fargo.

When asked about his activity in Wells Fargo, Buffett said the following:

“It’s absolutely true that we’ve sold down our position. Some of it was sold down to avoid being over 10%, because then you do have some filings with the Fed and so on. But, yeah, we’ve sold more than that [what was necessary to stay below 10%].”

When pressed further, Buffett essentially said he wasn't going to make any additional comments. But as opposed to relying solely on Buffett’s commentary, let’s look at the numbers. Here’s Berkshire’s quarterly activity in Wells Fargo and Bank of America common stock over the past two years:

As you can see, Buffett added roughly 30% to the Bank of America position in the back half of 2018 (and has since been relatively inactive). On the other hand, Buffett started reducing his Wells position in 2018, with the pace picking up substantially in the back half of 2019: over the past six months, he sold nearly 87 million shares, with a market value of more than $4 billion (assuming an average sale price of roughly $50 per share). Now, as Buffett suggested in the CNBC interview, keeping Berkshire’s ownership in either bank below 10% is part of his consideration. The only problem is that when you take a look at the numbers, that doesn’t appear to be an issue.

Long story short, Buffett’s explanation for the recent disposition of Berkshire's shares in Wells Fargo shares is (at best) a half-truth. That alone does not appear to explain why he actively sold the stock in the back half of 2019. As I thought about that, it left with me with a bit of a conundrum. Buffett, who has a storied career investing in financial institutions and has been a major Wells Fargo shareholder for decades, suddenly decided to sell 20% of his stake. And, for what it’s worth, that did not reflect any industry-specific concerns: he said on CNBC that Berkshire’s bank holdings are “very attractive compared to most other securities I see.”

At the same time, Berkshire had more than $100 billion in excess cash (no pressing need for the Wells Fargo sale proceeds), which makes the decision stand out even more. Finally, around the same time that he has been selling Wells Fargo, Buffett has significantly increased Berkshire’s investment in one of Wells Fargo’s closest peers. The combination of those events, in my mind, painted an ugly picture in terms of Buffett’s thoughts on Wells Fargo (at least when it was at $45 - $50 per share). Considering his long-term success in the industry, these changes should not go unnoticed by other Wells Fargo shareholders.

Conclusion

Long-time readers may have noticed that I have been unimpressed with the results at Wells Fargo. First, and most importantly, the company seems unable to get its regulatory issues resolved, which is impeding their ability to focus on serving customers and right-sizing the cost structure. In addition, it seems to me that bad news over the past year was delivered with some regularity; each quarter was another small step in the wrong direction. When bad news seems to persistently drip out over time like water from a leaky faucet, it's a bad sign. Finally, even if the new CEO proves to be a great choice, it seems that any meaningful progress will likely take years. In that time, industry peers like Bank of America and J.P. Morgan will continue to outpace Wells Fargo on deposits, loans, and net income growth.

All that said, I still felt comfortable holding a position in Wells in previous years. It struck me as a reasonably priced asset that was supported by significant capital returns to shareholders, along with the potential for some upside optionality if they ever managed to fix their nagging problems.

But then Buffett started selling.

To be clear, I’m not the kind of investor who looks at the actions of others for guidance. But I think Buffett and Wells Fargo is a unique situation. This investor selling this stock - in that case, I think it would be foolish to stick your head in the sand, which is, unfortunately, exactly what I did. Buffett knows banks, and he sold the one he knows best.

For this reason, I contemplated selling the stock in February after the CNBC interview (when I wrote most of this article). To be clear, selling Wells would have been a painful decision. I’ve publicly touted the stock for years, and it would have been an admission that I was wrong. In addition, I would feel like I had failed both in terms of the outcome on the investment and in sticking to my process (selling based on another investor's opinions). Even then, selling felt like the right move. Buffett’s actions, along with the fact that Wells Fargo is still plagued with internal issues years after the account opening scandal first came to light, led me to believe I was missing something. For that reason, I almost pulled the trigger in February.

But I never did it.

Today, the stock trades at $24 per share, down more than 40% from February. For what it's worth, I still own the stock and have bought more in recent weeks. Simply put, I think the investment decision today (at $24) is different than five months ago (at $40) - but time will tell if that's correct.

Disclosure: Long BRK.B, WFC, and BAC

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About the author:

The Science of Hitting
I desire to own high-quality businesses for the long-term. In the words of Charlie Munger, my preferred approach is "patience followed by pretty aggressive conduct." I run a concentrated portfolio, with the top five positions accounting for the majority of its value. In the eyes of a businessman, I believe this is sufficient diversification.

Rating: 4.9/5 (9 votes)

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Comments

xzhao10
Xzhao10 - 3 weeks ago    Report SPAM

With TBV around $30 per share, assuming all it earns next few years is used for charge-offs due to COVID and customer remediation, there is still a margin of safety, IMO. Best, -Xing

Valu2day
Valu2day premium member - 3 weeks ago

Nice article. In many ways it mirrors my own thoughts as I was close to selling WFC too. I did not sell either, but I am still hesistant to buy more shares.

Praveen Chawla
Praveen Chawla premium member - 3 weeks ago

I am cautious on WFC as I think it needs several quarters to stabilize. Allowance for loan losses are currently about 2% of gross loans. In 2009 they were over 3%. So I think there would be a few more quarters of elevated provisioning.

The Science of Hitting
The Science of Hitting - 3 weeks ago    Report SPAM

Xzhao - I agree :) Thanks for the comment!

The Science of Hitting
The Science of Hitting - 3 weeks ago    Report SPAM

Valu2day - We'll just have to wait and see how it goes from here!

The Science of Hitting
The Science of Hitting - 3 weeks ago    Report SPAM

Praveen - Agreed, it will take quarters, and more likely years, to address the issues at Wells.

Nicola Guida
Nicola Guida premium member - 3 weeks ago

Hi Science,

I like the fact that you've been honest with yourself admitting that selling WFC would have been an admission of failure. And, indeed, selling just because one of your heros is selling doesn't qualify as a thoughtful Value Investor behavior.

I also understand that you can be attracted by WFC at $24. But I didn't catch why you didn't sell the stock before knowing that W.Buffett was dumping 20% of his stake.

Which is the rationale of keeping WFC in the portfolio when you know that the issues will take quarters and maybe years to be solved, and that there are better banks at an attractive price around?

BRs, Nicola

The Science of Hitting
The Science of Hitting - 3 weeks ago    Report SPAM

Nicola - Around the time I was writing this (February), WFC shares were under persistent pressure. I would've been selling the company as it was becoming cheaper, which is always a difficult thing to do. So, before I took action, the stock basically fell from above $40 to less than $30 - at which point my decision changed. And as it relates to other ideas, Wells isn't the only bank that I own.

Valu2day
Valu2day premium member - 2 weeks ago

Science or should I call you "The Kid" or the "Splendid Splinter,"

Here is a link to an interesting article I read on Market Watch that has relevance and mentions WFC,

https://www.marketwatch.com/story/the-feared-jumbo-mortgage-debacle-is-here-thanks-to-the-coronavirus-and-ready-to-pound-the-housing-market-2020-07-22?mod=home-page

The Science of Hitting
The Science of Hitting - 2 weeks ago    Report SPAM

Valu2day - Thanks for sharing the link! And I like those names :)

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