Today I want to discuss a particular stock, Wells Fargo (NYSE - WFC). I think this company is a good microcosm of the financial crisis and can provide some unique insights to the financial crisis. Another reason I want to talk about it is because I own it personally, and tomorrow is a big day for WFC because it's coming out with quarterly earnings tomorrow morning. These earnings will be immensely important for reasons I will soon discuss.
What Does WFC Do?
WFC is a major financial institution engaging in a variety of banking activities. It has some retail branches, primarily located on the west coast and some in the midwest. However, a big chunk of its business comes from the mortgage industry. In fact, it's the world's second largest mortgage lender which, at one point last year had a mortgage portfolio of over $83 Billion.
What Makes It Different from Other Banks
During the real estate boom years which lasted most of this decade, WFC maintained a significantly more conservative risk profile than many of its competitors. It did not get heavily involved in the MBS market and maintained strict lending standards that, although prevented it from making the vast sums of money during the boom years that some of its competitors did, also helped it whether the downturn much better. The chart below shows the 2 year performance of WFC compared to the general banking index. As you can see, it has, for the most part, outperformed it's competition thoroughly:
Why the Recent Price Drop - A Tale of Two Banks
As you can see, WFC's stock price has dropped percipitously in January. Although the price is consistent with the industry's performance, I just said that the company is head and shoulders above its industry, so it should perform better, right?
Well, that would be true if it weren't for one thing - in the fall of 2008, WFC acquired a major competitor that was well on its way to becoming the next Lehman Brothers. Wachovia Bank, at one point the 4th larget bank in the US, suffered greatly through the financial crisis due to its exposure to the toxic financial assets. When it's prospect looked bleak last September, both Citigroup and WFC made competing bids to buy the company. WFC eventually won the bid because it offered signficantly more money than Citi and did not really on government support unlike Citi's offer.
This midnight deal gave a huge boost to WFC's branch network and deposit base, which is now estimated at almost $1 billion dollars. However, concerns arose around the toxic assets that WFC was also acquiring and if the company performed the necessary amount of due diligence to really understand what they were buying. These concerns came to a head over the last couple of weeks when Bank of America, who recently made its own major acquisition of Merril Lynch last year, revealed huge losses ($15.3 Billion) stemming from the takeover and prompted the Charlotte, NC based bank to ask for more government TARP money. Furthermore, B of A also cut the dividend it pays to investors to just $.01.
This news spread to WFC as well since the acquisition was made under similar circumstances - last second deals at the height of the crisis. Investors are worried that WFC will come out with similar results and may need to take a huge loss associated with the Wachovia deal now that WFC has had the time to digest it a little.
Why I Own The Stock
Many of you are probably asking why I would even think about buying a bank stock in this enviornment. In fact, I've been asking this a little myself with the recent performance of WFC I bought WFC last July at about $24 a share. After rising to almost $40 during the fall, it has since fallen to its current level of about $16. Well, here's a list of why I bought the stock:
- An unmatched record of ethical and stringent lending practices - the company is famous for it and, since the company doesn't get involved in the risky stuff, it provides better rates for it's higher credit mortgages. In fact, my parents have had 2 mortgages their lives, and both have been from WFC
- Increased Deposits During the Recent Storm - With other banks going under, more people have been moving their money to WFC. This positions the bank strongly to lend and grow once the enviornment gets better
- Well Respected Management Team - This is somewhat related to the first point, but the management team at WFC is comprised of longtime WFC veterans that closely follow the banks philosophy - thereby reducing the chance of a drastic departure.
- Warren Buffet Believes in it - Yeah, as cliched as it may sound, Warren Buffet is the single biggest shareholder of the company with an almost 11% stake through Berkshire Hathaway. My investing philosophy closely follows his, so it is a vote of confidence.
What to Expect Tomorrow
Tomorrow morning, WFC will come out with earnings which are expected to be at $.33 a share on revenue of $11.65 Billion. Although these numbers will be important, the market will also be closely listening to any indication as to the state of the Wachovia integration and any new losses stemming from the acuisition. If WFC can manage to dodge a bullet and hold the guidance they've previously provided on the deal, I can see the stock moving up significantly (10%+) as it will be a big sigh of relief. But I also think there's a good chance that WFC will be conservative in its results and write down all potential losses as early as possible in order to promote long term growth (this strategy is what convinced me to invest in them in the first place). Therefore, I wouldn't be surprised to see a big miss on the earnings front due to a large writedown, but promising future guidance.
We shall see what comes out of tomorrow's earnings release. Keep checking back on investingdecoded - I'll definitely share the news when it comes out.
Questions/Comments/Feedback?
Please don’t hesitate to let me know of any questions or comments you have about this post or any other. If you want me to write about something else investing related, do let me know!
The Standard Disclaimer:
The stuff I just wrote above is my opinion and my opinion only. Please do not take it as fact. Perform all necessary research and analysis prior to acting on anything I’ve said above. This includes consulting with a financial advisor.
© 2009 Sahil Bhatia
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