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Is Wells Fargo Still Warren Buffett's Favorite Buy?

Published 09/28/2016, 12:38 AM
Updated 07/09/2023, 06:31 AM

Recently, I wrote about the fact that's it's time for us to finally begin getting greedy when others are fearful, as delicious bargains were popping up all over the place. It’s now time to take action. Wells Fargo (NYSE:WFC), the biggest retail bank by capitalisation is again on sale.

Having recently sold out of my large position at its recent peak, I wasn’t sure if I could pick up one of Warren Buffett's as well as his long-time friend Charlie Munger’s favourite bank stocks again soon.

But a recent $185M fine and all the bad press of bank sales staff practices have created this opportunity. A $185M fine to a $232 Billion bank is literally peanuts financially.

Yes, its reputation has been slightly tarnished but it’s highly unlikely that it’s millions of customers will close their accounts and mortgages and switch over to another bank. This ain't going to happen.

So is it finally time to re-accumulate Wells Fargo (WFC) at a bargain? Its recent price reversal from a strong $45 price support limits our risk of ‘catching the falling knife’.

The following is what makes me to want to continue adding Wells Fargo to my long-term portfolio over the coming days. Please note, I am both a long-term deep value investor as well as a medium-term trader who utilizes the combination of both fundamental, technical and macro analysis to form a view of every investment I make. Doing so, I believe, leads to low risk and superior market beating returns over the long run.

Fundamental Factors


The Bad

  • Wells Fargo has suffered from bad press lately, due to illegal as well as immoral sales staff practices, opening accounts without customers' full consent and knowledge.
  • After a recent fine of $185M, although not large for a bank of its size, WFC will likely now be much more scrutinized by banking regulators going forward.
  • A weak Earnings Per Share (EPS) is forecast


The Good

  • Intrinsic valuation of $52-$62 (approx.), so WFC is currently well below intrinsic value with a margin of safety built in at current prices.
  • Warren Buffett would always say that “it is far better to pay a fair price for a great company, than pay a wonderful price for a sub-par company”, with Wells Fargo we actually get both. Great company at a great price.
  • A Return on Equity of over 12%, the biggest for all the major banks.
  • EPS have been strong over the past 5 years.
  • Undemanding P/E ratio of about 11
  • Strong dividend yield of about 3.3%


Technical Factors


The Bad

  • Recent $50 key price support level was broken.
  • Price is currently below the 20, 50 and 200 day moving averages.

The Good

  • There seems to be strong price support at the $45 price level.
  • The stock is oversold on a variety of momentum indicators and buying volume is well above average over the past week.
  • Value-seeking fund managers like myself will take advantage of this banking giant now on sale.


Other Factors

For longer-term investments, I generally like to see who else is on board with me and where the smart money has found its home. In my opinion, actions always speak louder than words. Wells Fargo is a widely held stock by smart money:

  • Charlie Munger – 67.3% of portfolio managed
  • Warren Buffett – 17.5% of portfolio managed
  • Lou Simpson – 11.66% of portfolio managed
  • David Abrams – 6.85% of portfolio managed
  • Tweedy Browne – 6.65% of portfolio managed
  • Chris David – 5.06% of portfolio managed


And many more…

Conclusion

Just over a week ago, I was fortunate enough to sell out of my entire, large, Wells Fargo position and lock in a sizable capital gain at close to its recent peak. I have been waiting to hopefully again pick up one of my favourite stocks.

Fortunately, this has occurred much earlier than expected. As long as strong buying volume continues, I will be personally adding more Wells Fargo into our long-term portfolio over the coming days. You may want to check out Wells Fargo too.

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