This is Wells Fargo: And Wall Street Has Shunned It.
As COVID-19 has wreaked havoc on our nation’s economy, the bank and financial industry have taken a big hit on Wall Street, partly because of memories of the role they played in the 2008 Financial Crisis that hit investors so hard. Investors have avoided the group for fear the recession will crush profitability and result in rising loan losses. XLF, the financial select sector SPDR Fund, is down 11.26 over 3 months and 22.45 year-to-date. Unfortunately, banks and financials are the “canary in the coal mine” for the health of the economy, and they have lagged every sector but energy since the market low in March.
While the coronavirus pandemic has taken a toll on bank stocks across the U.S., Wells Fargo’s drop is the steepest among its main peers this year. Over the past 3 months, the company’s stock is down -32.40%, YTD it is down -49.07% and over a 1 Year period it has lost -38.25%. Wells Fargo’s stock hit an 11 year low of $22.00 May 13, 2020. The Federal Reserve imposed an unprecedented cap on the firm’s assets in early 2018 due to its fake accounts scandal, making it difficult for it to add customers and loans, because it has lost $220 billion dollars in stock-market value since then. The mistakes involving a hit on customer trust were indefensible, and the public has placed a large cloud of disdain over Wells Fargo. Because of this, investors find it almost distasteful to carry a long position in Wells Fargo stock.
Wells Fargo has a large loan portfolio of around $399 billion in community loans and $456 billion in commercial loans (as per 2019 data). Adding to that, the community and commercial banking segments together generated around 72% of the bank revenues in 2019, which implies that the bank is heavily dependent on the two segments. With unemployment exceeding 40 million Americans, and many businesses stretching their finances very thin to stay intact, this could very well impact the loan repayment capabilities of both commercial and community banking customers, making Wells Fargo a candidate for the possibility of major losses.
On top of this, on May 6, UBS reduced its forecasts for earnings at the bank in 2020 and 2021 by 47% and 24%, respectively. Overall, UBS trimmed forecasts at large and regional banks by 25% in 2020, on average, and 18% for 2021. Finally, on May 15, Analysts at Keefe, Bruyette & Woods listed 21 banks they say are “potential dividend cut candidates.” They believe that Wells Fargo is the largest potential candidate listed for a dividend cut, the only “universal bank” on the list.
Warren Buffett “Be Greedy When Others Are Fearful”
Wells Fargo has been through crises before. The bank has weathered events like the 2008 financial crisis, coming out with their stock by late 2009 almost tripled by the crisis lows. The fake accounts scandal that saw it severely punished by the Federal Reserve in 2018 was not a punishing blow, as the stock reached a 52-week high of $54.75 on November 29, 2019. I see no reason this won’t happen again. Bireme Capital recently released its Q1 2020 Investor Letter, and it stated that they estimate that Wells Fargo will be able to generate about $15-$18 billion of profits per year, only slightly lower than the $18-$20 billion they generated between 2017-2019.
I read an amusing headline recently From InvestorPlace contributor Tyler Craig, saying, “Wells Fargo Is the Ugliest Bank Stock on the Planet. If this was true, why would the “Oracle of Omaha,” Warren Buffett, have the stock as his fifth largest holding in his portfolio. Furthermore, Buffett is loaded with bank stocks, giving the sector credibility and confidence in its direction moving forward. Let’s not forget that Wells Fargo has been around for 168 years, and is the fourth largest bank in America. Wells Fargo has the ability to absorb more losses and still come out of it comfortably on the other side. Plus, they have stashed away millions of dollars, while they are being smartly prudent about giving out mortgage loans and home refinancing to consumers, and car dealerships on the commercial front.
On Feb 11, Wells Fargo & Co Chief Executive Charles Scharf announced his first major reshuffle on Tuesday, promoting several executives to new roles while also tapping a JPMorgan veteran to head consumer lending.The shakeup is aimed at putting a new structure in place as the bank looks to rebuild its reputation and increase accountability, the bank said in a statement. The new structure is reminiscent of JPMorgan Chase and, no surprise, Scharf is a former executive with that bank. He was quoted as saying, “I firmly believe we have a great future in front of us. We have a group of businesses that are the envy of the industry. We have great market positions in an industry that will continue to grow as we enable our customers to succeed financially. We can and will do the work necessary to create the right environment inside the company to allow us to grow successfully. We know we have some challenges in front of us. I feel very confident that we know what we have to do, and we will get it done.
Finally, there are certain factors when looking at the economy that should bode confidence that Wells Fargo will not be cutting their large 8% dividend. First, the $2 trillion Coronavirus relief package that most Americans were a part of gave them extra money to keep afloat for sometime. Also, the unemployment checks that some are receiving are larger than their typical weekly paychecks. Finally, Americans are putting more money into savings than ever before. This should help banks collect loans and make Wells Fargo dividend payment to shareholders for the most part secure.
In summation, I see Wells Fargo as being currently undervalued. As the economy is starting to open up, banks will be a vital part to its success. When buying Wells Farago stock, you are buying them on the cheap. This is a well established company that offers a huge dividend to its investors. They have a new management full of years of experience working at top banks in our country. They should be able to move Wells Fargo forward. I must say that this is a stock for long term patient investors, who can wait about five years to collect on financial gains. You need to look past the short term of bad behavior and COVID-19 to see that Wells Fargo will rise again. And the time to invest is now.
Disclaimer : This material should not be considered investment advice. After Further Review…The Stock is Reversed or Bob Schless are not registered investment advisors. Under no circumstances should any content from this blog, website, articles, videos, seminars or emails from After Further Review…The Stock is Reversed or Bob Schless should be used or interpreted as a recommendation to buy or sell any type of security or commodity contract. This material is not a solicitation for a trading approach to financial markets. Any investment decisions must in all cases be made by the reader or by his or her registered investment advisor. This information is for speculative purposes only.