Greetings Optimizers, today I would like to discuss a recent investment, and dissect the reasoning that went in to it. 2 weeks ago, after WFC earnings, the stock dropped significantly. It had been trading in the $53 range before its earnings announcement. The earnings miss was significant. The estimate was $1.12 and earnings came in at .60 per share, mostly due to higher legal costs due to the recent scandal, and lower interest rates impacting their net interest rate margin. I saw this as an opportunity, since Wells has a wide economic moat, a strategy for cross selling products to customers, and a healthy dividend. when it dropped to the $50 dollar range, I decided to buy.
Fast forward to today, the pain for the stock has continued for another week, but now it seems the stock has gained its footing in the $47.50 context. Currently, my investment is down about $675 dollars. I tried to catch a falling knife, and got cut on the way down. This is probably a valuable lesson not to pull the trigger to early on a stock that is down on negative sentiment. I see this one as a long term hold for me, and would consider subsequent buys since the stock is currently yielding a healthy 4.3%. I will happily get paid to wait for the stock to recover, especially since Wells has been raising its dividend by an average of 8.2% for the past 3 years. Its pay out ratio is currently 35.12% of earnings so the dividend is safe by most metrics, and has no reason not to grow.
The bank has committed to an aggressive buyback program, which will help bolster the stock price, announcing a 23. billion dollar program in 2019. By reducing the number of shares outstanding, it will help boost earnings per share (EPS) in future quarters. The stock currently trades at 11.75 current earnings and 10 times the forward price to earnings ratio quite similar to its banking peers. Wells is also a Free Cash Flow monster, producing $4.69 dollars of FCF per share in 2019, more than twice that of what Bank of America BAC produces at $2.17 per share.
The company, and new CEO Charles Scharf have much work to do. The reputational damage done by the fake accounts scandal has severely impacted market sentiment for the stock. This will not be easily undone. Warren Buffet once said, “it takes 20 years to build a reputation, and 5 minutes to ruin it” Scharf has learned from the best, spending years under Jamie Dimon at JP Morgan Chase. Dimon was at the helm of JPM during the “London Whale” scandal where a rogue traders series of credit default swap trades went south and trading losses of $6 billion were realized. Since that scandal, JP Morgan has cemented itself as the premiere investment bank and Dimon is now on the Mount Rushmore of CEOs on Wall Street.
In Conclusion, my position in WFC is still in the hole, but I consider time and the markets on my side. From almost every statistical measure the stock is moderately valued and will pay me to wait. I would love to get peoples opinions on this position, especially those who care to play devils advocate. I am passionate about investing, but I strongly feel that patience and OBJECTIVITY is paramount when your own money is at stake. I appreciate your feedback and thank you for reading!