IP Capital Partners recently released its Q3 investor letter (download a copy here). According to the letter, the Brazil-based asset management firm bought shares of Wells Fargo & Co (NYSE:WFC) during the third quarter. Earlier this year, IP Capital decided to close its medium-sized position in WFC to benefit from a significant rise in share prices.
IP Capital discussed Wells Fargo and three other companies in its letter to investors. In this article, we will take a look at what the investor said about WFC:
Recently, the company’s market value declined once again, widening the gap further to other American banks’ share performance. Since September 2016, the U.S. banking sector index has returned 37.4%, while Wells Fargo shares have appreciated 13.8%.
The image crisis has cost Wells Fargo dearly. The company was a darling of the American financial industry given its track record, conservative credit policy, high ROE, cheapest funding in the industry, and for being less complex than other major players.
For these reasons, it has always traded at a premium to most listed banks. The situation has now reversed: the company is trading at a discount to its peers. The positive points mentioned above have not changed with the recent crisis. On the downside, revenue growth should be slightly lower. However, the company plans to reduce its cost base by U$2 billion in the next two years, which should offset the slower revenue growth.
Another encouraging aspect is how the new leadership has dealt with this institutional crisis amid the harassment promoted by the American media. Unlike Wells Fargo’s former CEO, John Stumpf, who mistakenly minimized the problem, current management has attacked the problem head-on. In addition to carrying out the biggest clawback in U.S. history by recovering US$180 million in previously paid bonuses to its executives, the bank is also scanning its past to locate other clients that may have been harmed.
Furthermore, the loan portfolio has been managed more conservatively. In recent years, the bank has reduced riskier credit modalities, such as vehicle and student financing. Along with credit cards, these are the fastest growing types of credit granted in the U.S., and have shown high default rates, even amid the low unemployment environment. At Wells Fargo, these loans account for only 11% of the total portfolio – a figure well below other listed banks.
Finally, given the excess capital after Basel III compliance, if growth slows in the future, profit payout should increase for shareholders. Not bad, though we still would prefer to reinvest profit given the bank’s two-digit ROE.
The recent drop in prices presented a good opportunity to buy back shares we had previously sold, with more visibility on problems that are now clearing up.
Wells Fargo & Co (NYSE:WFC) is a popular stock among the hedge funds tracked by Insider Monkey. There are 81 funds in our database with bullish positions in the banking giant. Among those investors is Warren Buffett, who has been a strong believer in WFC. Buffett’s Berkshire Hathaway is one the top stockholders of the bank.
Shares of Wells Fargo & Co (NYSE:WFC) are up nearly 2% this year. In a comparison, S&P 500 has gained just over 18% and JP Morgan’s stock has surged more than 21% since the beginning of the year. Over the last 12 months, WFC has increased around 4%, while S&P 500 has climbed up 20.53% during the same period.
Meanwhile, Wells Fargo is the one of the: 10 most successful holding companies in the United States; 10 biggest socially irresponsible companies in America; and 11 most profitable companies in the Fortune 500, according to our researchers.