September 19, 2016

Avoid Wells Fargo stock

"Everything we do is built on trust. It doesn't happen with one transaction, in one day on the job or in one quarter. It's earned relationship by relationship." 
- Wells Fargo's Visions and Values

Let me distill my view on WFC stock down to one word: Avoid.

Wells Fargo's premium valuation is likely to be impaired over a period of time from the discovery of nearly two million fraudulent accounts.

I have never really understood the premium valuation of the bank. To be sure, Wells Fargo has a vast and dominant franchise and deposit base. It is involved in one out of every three mortgages in the U.S. But, given that over the last five years the company's pretax income (before loan loss provisions) has made no progress, others may now question that premium valuation. 

Importantly, given the broad involvement of more than 5,000 employees, I would not be surprised if more untoward transactions were uncovered in discovery in the next several months, which would provide a further case for a contraction in the bank's valuation.

Bottom line, I would stick with Bank of America (BAC) or Citigroup (C) if one is interested in exposure to the banking space.

Buffett Will Likely Soon Break His Silence on Wells Fargo

"Lose money for the firm and I will be understanding. Lose a shred of reputation for the firm and I will be ruthless."

-- Warren Buffett

And here is a contrary thought.

Given the size of Berkshire Hathaway's (BRK.B) Wells Fargo holdings (10% of the shares outstanding) and Buffett's previous comments over more than two decades regarding his confidence in the bank and its management, most believe that The Oracle will publicly support Stumpf and the management team sometime over the next few days/weeks.

I don't agree.

While I don't think Buffett will provide any indication that he will sell his stock (it's not his "style"), I do expect an uncommon and strong reprimand. I suspect that privately he is furious and, in the time ahead. I don't think Buffett will buy more or sell his WFC holdings. He will likely stand pat. (The sins of Salomon still likely lie in Warren's mind and thoughts.)

One final thought.

As I have clearly detailed in the last three years, it remains my view that Warren Buffett has lost his way in his investment portfolio as many of Berkshire's largest investment portfolio positions are moatless, "old economy" companies -- such as IBM, American Express and Coca-Cola -- that have been consistent market underperformers.

From my perch, Wells Fargo is yet another one of the aforementioned old-economy company, as the now heavily regulated banking industry moves ever closer toward delivering a commoditized and non-differentiated product ... and lower returns on invested capital.

via thestreet