In his 1981 book "The Money Masters," John Train, while profiling Warren Buffett, compares great investors to great art collectors who must buy what is currently out of fashion and patiently wait until is comes back into fashion. Wells Fargo is not only currently out of fashion but also a rare masterpiece among companies.
Wells Fargo's problems have been well publicized. The bank's former senior managers created incentives that induced bad behavior by many employees and then they acted slowly to correct the situation that they should have realized they were creating. For a bank that has historically been one of the better run banks, this is an uncharacteristic episode in its history. Although the bank's reputation has endured damage and its assets are currently capped by regulators at $2T, its performance has remained stable. The company continues to earn over $22B in annual net income. This stable performance in the face of overwhelmingly negative publicity is a testament to the company's durable competitive advantages.
Despite its difficulties, Wells Fargo remains a legendary financial institution with significant scale combined with exceptional risk management and operational expertise. The bank will likely continue to face bad press in the near term, especially during the election cycle. However, it will emerge as a stronger company and will resume its growth when the asset cap is eventually removed. Wells Fargo remains a long term growth story.
Wells Fargo, at Friday's close of $45.70 a share, has a current market capitalization of about $205B. The current market cap is close to the current amount of shareholders' equity, $197B, and well under shareholders' equity if the amounts for repurchased shares are excluded. This is a rare occurrence. Further, with the ability to earn over $22B, a conservative estimate of the company's value even in the absence of growth is over $220B.
Disclosure: The author owns shares of Wells Fargo. This report by Durable Stocks is informational only and not a specific recommendation to buy or sell the shares of any company.
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