This Day On The Street
Continue to site
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

Wells Fargo Making Waves on Wall Street (Update 1)

Wells Fargo's stock trades at a substantial valuation premium to those institutions (see chart below). There is some disagreement about the reason for Wells' higher price. Sloan argues business diversification is an important part of the equation.

"We've got a lot of businesses. None in particular is so great or so large that it creates a lot of volatility in our earnings stream. When you look at our loan portfolio, it's about 50/50--well maybe 55/45--consumer to wholesale. You look at how we generate income and it's about 50/50 between loan spread and securities spread and fees. You look at our fee income and it's very diversified across different fee types. That's why I think we are viewed as trading at a premium versus others," Sloan says.

There are other possible explanations. The fact that Wells Fargo has less exposure to Europe than the other big U.S. banks is clearly part of the equation.

Another factor, contends Gary Townsend, principal at financial services focused hedge fund Hill Townsend Capital LLC, is that Wells is less exposed to mortgage-related liability than either JPMorgan or Bank of America. That's because many of the troubled mortgages Wells acquired come from Golden West Financial Corp., which Wachovia bought for $25 billion in 2006.

"Golden West didn't do a lot of securitization, so most of those mortgages are held in portfolio rather than by investors or Freddie Mac (FMCC.OB)or Fannie Mae (FNMA.OB)," says Townsend.

Rochdale Securities analyst Richard Bove attributes Wells' higher valuation to steady double-digit earnings growth. As long as the company can keep that up, Bove doesn't think it matters which businesses it comes from.

"You can go back 20-25 years and there are very few times when Wells couldn't show a 10% plus growth in earnings. You can't do that for JPMorgan. JPMorgan has a highly cyclical earnings record and even though they did a phenomenal job coming through the crisis it's still a highly cyclical earnings record," Bove says. (A JPMorgan spokeswoman declined to comment.)

Wells CFO Sloan argues there is no reason investment banking and capital markets need to be riskier than commercial and consumer banking.

"I don't view this as any bit different from when the [commercial mortgage backed securities] market got crazy in 2007 and we started to put our pencils down because we just weren't going to originate some of those loans. When the residential mortgage business got crazy in 2006-7 and there were all sorts of option ARMs and low down payment loans and all that kind of stuff we didn't do that," he says.
2 of 3

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Options Profits

Our options trading pros provide over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • Actionable options commentary and news
  • Real-time trading community
SYM TRADE IT LAST %CHG
BAC $17.88 0.00%
C $58.37 0.00%
GS $206.24 0.00%
JPM $68.05 0.00%
MS $39.25 0.00%

Markets

Chart of I:DJI
DOW 17,630.27 +189.68 1.09%
S&P 500 2,093.25 +25.61 1.24%
NASDAQ 5,089.2060 +49.43 0.98%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs