Wells Fargo (WFC) Has Fallen 49% in Last One Year, Underperforms Market

If you are looking for the best ideas for your portfolio you may want to consider some of Saber Capital Management’s top stock picks. Saber Capital Management, an investment management firm, is bullish on Wells Fargo & Company (NYSE:WFC) stock. In its Q2 2019 investor letter – you can download a copy here – the firm discussed its investment thesis on Wells Fargo & Company (NYSE:WFC) stock. Wells Fargo & Company (NYSE:WFC) is a financial services company.

On July 19, 2019, Saber Capital Management had released its Q2 2019 investor letter. Wells Fargo & Company (NYSE:WFC) stock has posted a return of -48.5% in the trailing one year period, underperforming the S&P 500 Index which returned 17.1% in the same period. This suggests that the investment firm was wrong in its decision. On a year-to-date basis, Wells Fargo & Company (NYSE:WFC) stock has fallen by 52.9%.

In Q2 2019 investor letter, Saber Capital Management said the fund returned 24.4% in the first half of 2019, outperforming the S&P 500 Index which returned 18.5% in the same period. Let’s take a look at comments made by Saber Capital Management about Wells Fargo & Company (NYSE:WFC) stock in the Q2 2019 investor letter.

“We were very active in December and early January, but then things quieted down and outside of the minor downturn in May when we added to a few positions, we didn’t make a single new investment until late in the 2nd quarter, when we began buying shares of Wells Fargo. I wrote more details on the investment here.

Incentives drive behavior, good or bad. And without question, Wells Fargo’s behavior was bad prior to 2016. But two CEO’s have left the firm, and just as its safest to fly right after a crash, I think Wells has corrected the incentive issue, and is laser focused on ensuring that their customers are taken care of. I’ve noticed this as I do much of my business and my personal banking there. This case is also a testament to how sticky the big banks are.

Despite glaring headlines, lots of political rancor, and high-profile hearings, customers seem to have mostly yawned. Deposits stood at $1.3 trillion during the climax of the scandal, a level where they remain today. Deposits are the raw material that a bank uses to make its finished goods (interest income), and Wells Fargo has had no trouble maintaining its supply. The company remains among the best banks in terms of funding costs and profitability. Returns on assets have remained strong, matching or even exceeding the ROA of its competitors.

What makes Wells Fargo attractive right now? In late June, the Federal Reserve published the results of their annual Comprehensive Capital Analysis and Review (CCAR). The CCAR and its cousin, the Dodd-Frank Act stress tests, are a big portion of the regulatory framework that the Fed uses to supervise the big banks in the United States. Part of this regulation gives the Federal Reserve the authority to approve the capital allocation program of the banks.

Basically, each bank submits the dollar amount of capital that they’d like to return to shareholders over the coming 4 quarters, and the Fed, based on their review of how the bank performed during the stress tests, either approves or rejects the bank’s proposal. In recent years, most of the big banks have built up sizable capital positions, and they’ve had no real trouble getting Fed-approval for their buyback and dividend.

This table summarizes the buyback approval (in billions) and dividend yield for the big four banks for the upcoming year. The buyback “yield” is the percentage of the shares outstanding that each bank could acquire at the current share price:

The table shows that at the current price, Wells Fargo can buy back 11.5% of its shares in the coming year (this is on top of the 9% they bought back last year). Thanks to its extensive amount of excess capital and strong earning power, Wells has turned into what Charlie Munger calls a cannibal: a firm that eats up its own shares.

After this year’s buyback, Wells will be left with around 4 billion shares outstanding. With no growth in overall earnings, this will equate to nearly $5.75 per share in earning power a year from now. At $46 per share, the stock trades at just 8 times that earning power. Another way to look at it: Wells Fargo is likely going to buy back around $40 billion worth of stock in the next couple years. Again, assuming the current level of overall earnings (no growth), we’ll have a business with over $6 of earning power and at 11 or 12 times earnings, a stock worth somewhere between $65 and $75. Including the hefty 4%+ annual dividend, that is 50-75% upside for a boring, staid bank.

Of course, this is the value per share. The stock price of course might not reflect this value in the time frames I’m outlining above. Economic headwinds and a market downturn would certainly cause the stock price to fall and potentially impact near term earnings, but Wells Fargo has a great balance sheet, a sticky customer base, and a predictable business that is very well prepared to ride out future storms.

I think Wells Fargo is actually facing a similar type of negative sentiment that Facebook was (and is still) facing. The sentiment winds can shift at unpredictable moments, and I think eventually the market will value Wells Fargo’s cash flow more appropriately. In the meantime, the bank gets to use a bunch of that cash to buy back shares on the cheap, and we are getting a 16% “yield” (partially in cash and partially as a greater piece of the business), which isn’t a bad result on its own.”

Wells Fargo WFC

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In Q2 2020, the number of bullish hedge fund positions on Wells Fargo & Company (NYSE:WFC) stock increased by about 13% from the previous quarter (see the chart here), so a number of other hedge fund managers seem to agree with Wells Fargo’s growth potential. Our calculations showed that Wells Fargo & Company (NYSE:WFC) isn’t ranked among the 30 most popular stocks among hedge funds.

The top 10 stocks among hedge funds returned 185% since the end of 2014 and outperformed the S&P 500 Index ETFs by more than 109 percentage points. We know it sounds unbelievable. You have been dismissing our articles about top hedge fund stocks mostly because you were fed biased information by other media outlets about hedge funds’ poor performance. You could have doubled the size of your nest egg by investing in the top hedge fund stocks instead of dumb S&P 500 ETFs. Below you can watch our video about the top 5 hedge fund stocks right now. All of these stocks had positive returns in 2020.

Video: Top 5 Stocks Among Hedge Funds

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Disclosure: None. This article is originally published at Insider Monkey.