Why Wells Fargo (WFC) Stock is a Compelling Investment Case

Bill Nygren from Oakmark Funds recently released its Q3 2020 Investor Letter, a copy of which you can download here. You should check out Bill Nygren’s top 5 stock picks for investors to buy right now, which could be the biggest winners of this year.

In the said letter, Bill Nygren highlighted a few stocks and Wells Fargo & Company (NYSE:WFC) is one of them. Wells Fargo & Company (NYSE:WFC) is a financial services company. Year-to-date, Wells Fargo & Company (NYSE:WFC) stock lost 53.0% and on October 9th it had a closing price of $25.30. Here is what Bill Nygren said:

“One of our many financial holdings, Wells Fargo, has a market cap just under $100 billion, less than three-quarters of Zoom’s cap. But Wells is one of the big three retail banks in the U.S. along with Bank of America (also a current portfolio holding) and JPMorgan. The demand for retail banking has been relatively predictable and has grown with GDP. Ten years ago, the same three banks were the largest. Due to economies of scale, their market share has grown over the past decade. It doesn’t take much imagination to assume that 10 years from now, the banking industry will be larger than it is today and that these three competitively advantaged banks should have more market share. Banks have historically earned a low-to-mid teens return on their tangible equity, and we expect that to continue. The relatively narrow range of outcomes for any of the large banks stands in stark contrast to the very wide range for a small business like Zoom.

With many of the banks, including Wells and Bank of America, priced at single digit P/E ratios, we believe reversion to the mean is on our side. Financial stocks, including banks, have typically sold at about two-thirds of the S&P 500 multiple. They are currently trading at seven to eight times pre-Covid-19 earnings. And if they have accurately estimated their Covid-19-related charge-offs, they should quickly return to those earnings. We believe they deserve P/E ratios at least 50% higher than their trailing P/E ratios, which would be consistent with their long-term average. And when (or if) interest rates eventually rise, they are expected to produce a further increase in earnings. Compared to the small businesses that are now large-cap stocks, we believe the banks are both less risky and have larger expected returns.”

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

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost real estate prices. So, we are checking out this junior gold mining stock and we recommended this real estate stock to our monthly premium newsletter subscribers. We go through lists like the 10 most profitable companies in the world to pick the best large-cap stocks to buy. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free enewsletter below to receive our stories in your inbox:

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