3. Wells Fargo & Company (NYSE: WFC)
Wells Fargo is one of the biggest banks and mortgage lenders in the U.S. Its consumer-lending platform accounts for more mortgages than any other service in the country. In February, the bank said that its mortgage origination was “still growing” on a year-over-year basis despite expectations of a slowdown this year. Wells Fargo recently agreed to sell Wells Fargo Asset Management to private equity firms GTCR LLC and Reverence Capital Partners for $2.1 billion.
As of the end of the fourth quarter, 99 hedge funds in Insider Monkey’s database of 887 funds held stakes in Wells Fargo & Company, compared to 90 funds in the third quarter. Warren Buffet’s Berkshire Hathaway is the biggest stakeholder in the company, with 52.4 million shares, worth $1.58 billion. Wells Fargo & Company ranks 23rd in our list of the 30 Most Popular Stocks Among Hedge Funds: 2020 Q4 Rankings.
In their Q4 2020 Investor Letter, Argosy Investors’ highlighted a few stocks and Wells Fargo & Company (NYSE:WFC) is one of them. Here is what Argosy Investors’ said:
“Most of us are familiar with Wells Fargo (WFC); they are one of the top 5 banks in the U.S. with nearly $2 trillion in assets. The last 5 years have not been good to Wells. They are on their 3rd CEO during that time, and the current one stays in New York City despite headquarters being in San Francisco. Wells Fargo opened millions of fake accounts for customers over several years, driven by an incentive system that compensated branches based on their account openings. This goes to show you the perverse power of incentives, if not properly balanced. To atone for their sins, Wells Fargo is operating under an asset cap which prevents the bank from growing and must demonstrate stronger risk management. Not that long ago, Wells Fargo was the most admired large bank on Wall Street, with the highest valuation and glowing reviews about its low cost of funds driving sustainably high returns on equity. Now, it has the lowest valuation on Wall Street and no one talks about the good old days with Wells.
I believe that there is nothing fundamentally wrong with Wells Fargo’s business that cannot be fixed, and once they can return to normal operations without the fake account nonsense then I expect they will return to earning returns slightly lower than historical norms. If Wells Fargo uses 100% of its earnings to repurchase share over the next 3 years, Wells can retire 25% of its outstanding stock. By 2023, WFC could earn $6+ per share. At 10x earnings, a very low multiple given the rest of the stock market trades at 22x earnings, Wells Fargo could fetch $60 per share. WFC’s current share price is $33 and our cost basis is around $25 per share. If it takes 5 years for Wells to get out of the penalty box and trade at $60 per share, we can earn a 20% annual return on our investment, including dividends.”
