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Wells Fargo & Co (WFC) Posts Lower Earnings In Q2 But Meets EPS Expectations (Due To Share Buybacks)

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Wells Fargo & Co (NYSE:WFC) reported lower earnings for the second quarter on Tuesday as it grapples with low interest rates resulting in loan growth but lesser profits. The firm reported net income of $5.72 billion, or $1.03 per diluted common share, for the just-ended quarter, down from $5.73 billion, or $1.01 per share, for the second quarter 2014. EPS increased because of continuing share buybacks reducing the number of outstanding shares. Revenue was reported to be $21.32 billion, up from $21.07 billion in the second quarter of 2014.

Wall Street was expecting earnings of $1.03 per share on $21.7 billion in revenue. The bank reported strong growth in average loans and deposits, with total average loans of $870.4 billion, up $39.4 billion from the same quarter last year. Total average deposits was also reported to be $1.2 trillion, up by $83.8 billion. Wells Fargo & Co (NYSE:WFC) also highlighted continued strength in credit quality, as net charge-offs declined to $650 million in the second quarter of 2015, a $67 million drop from the second quarter of 2014. The financial behemoth also said that it had maintained strong capital levels, evidenced by its 10.5% Common Equity Tier 1 ratio under Basel III (fully phased-in). Wells Fargo also boasted of continued share buybacks and an increase in its quarterly common stock dividend to $0.375 per share from $0.35.

Wells Fargo WFC

Rob Wilson /

Loan growth did not directly correlate to profitability, however, as the net interest margin of the firm, used to gauge how profitably it loans out deposits of customers, was reported to be 2.97% in the latest reported quarter, down from 3.15% a year ago. Costs also went up by 2.3% to $12.47 billion for the firm. Furthermore, some units of Wells Fargo & Co (NYSE:WFC) sailed rougher seas than others. The Mortgage business of the firm posted $1.71 billion in earnings for the just-ended quarter, down from $1.72 billion in the same quarter last year. The slide in the firm’s earnings seems to have investors worried, as the stock’s price also slid to $55.90 per share in pre-market trading, down by 1.45%. Year-to-date, the stock has climbed by 3.47% (not factoring in the pre-market dip).

It appears that the smart money tracked by Insider Monkey foresaw the performance difficulties of the firm for the just-ended quarter. Wells Fargo & Co (NYSE:WFC) was in 72 hedge funds’ portfolios at the end of the first quarter of 2015, down from the 78 hedge funds in our database with Wells Fargo holdings at the end of the previous quarter. The value of the holdings, however, increased, although at a nominal 0.41% quarter-over-quarter to $31.81 billion on March 31. The firm’s shares declined by 0.77% in the first quarter.

Nonetheless, let’s take a step back and analyze how tracking hedge funds can help an everyday investor. Through our research, we discovered that a portfolio of the 15 most popular small-cap picks of hedge funds beat the S&P 500 Total Return Index by nearly a percentage point per month on average between 1999 and 2012. On the other hand, the most popular large-cap picks of hedge funds underperformed the same index by seven basis points per month during the same period. This is likely a surprise to many investors, who think of small-caps as risky, unpredictable stocks and put more faith in large-cap stocks. In forward tests since August 2012, these top small-cap stocks beat the market by an impressive 80 percentage points, returning over 135% (read the details here). Hence, a retail investor needs to isolate himself from the herd and take advantage of the best growth opportunities in the market by concentrating on small-cap stocks.

Furthermore, Insider Monkey tracks insider transactions such as buying or selling of shares by company executives or other insiders. This tells us whether insiders are also bullish on their firms’ shares. Wells Fargo & Co insiders have not purchase any shares of the company this year. Senior Executive Vice President Michael Loughlin, on the other hand, sold 20,000 shares on June 2. Timothy Sloan, also a Wells Fargo Senior Executive Vice President, sold 50,000 shares of the firm on May 15.

Bearing all of this in mind, we’re going to take a glance at the recent hedgie activity regarding Wells Fargo & Co.

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