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 Earnings and 'Green Shoots'

With each passing quarter, Wells Fargo seems to record over $500 million in gains from improvements to its $800 billion portfolio of mortgage, auto and commercial real estate loans. Investors would now have a hard time differentiating the quality of those loans from those made in 2006, before the housing market cracked the U.S. economy.

Prior to second-quarter earnings, meanwhile, Wells Fargo was sitting on over $11 billion in unrealized gains to its securities portfolio, helping the bank to shore up its balance sheet and capital ratios amid Fed stress testing and oversight on the payout of dividends.

As the Fed now considers easing its unprecedented efforts to hold long-term interest rates down, those such rate-of-change benefits will disappear as a factor driving Wells Fargo's earnings.

Long Live Green Shoots.

Put simply, Wells Fargo needs imminent green shoots of economic growth, mortgage demand and business hiring and for those plantlets to flower into a full-fledged recovery.

"Two years from now, if people are excited about Wells Fargo, it's going to be about the huge market share they have on Main Street," Bill Smead, Chief Investment Officer of Smead Capital, said in an interview ahead of the bank's earnings.

Smead sold Wells Fargo shares in late 2008 and early 2009 amid a worsening of the financial crisis and uncertainty over the government's intervention in the banking sector. In 2009, the fund rebuilt its position in Wells Fargo starting at about $17 a share on an expectation the bank could earn about $4 a share in a weak economy. Now Smead holds Wells Fargo shares on the belief earnings can move higher if a real recovery emerges.

After-tax profits of $7 a share and a stock multiple of 11 times earnings in a few years' time would drive similar stock gains to those posted from 2009 to present. If green shoots once again disappoint, however, Smead and a cohort of bullish Wells Fargo investors such as Warren Buffett would be in for a rough ride.

Wells Fargo, for its part, continues to make the case to investors its business is diversified enough to benefit from both an easing of the financial crisis and an incipient recovery.

Chief executive officer John Stumpf on Friday said the bank saw its strongest post-crisis housing market activity in the second quarter. Stumpf also reiterated a well-worn refrain that the bank is not dependent on any one of its businesses for growth.
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 $58.46 0.00%
JPM $68.53 0.00%
WFC $57.87 0.00%
AAPL $121.30 0.00%

Markets

Chart of I:DJI
DOW 17,689.86 -56.12 -0.32%
S&P 500 2,103.84 -4.79 -0.23%
NASDAQ 5,128.2810 -0.5040 -0.01%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs