Warren Buffett Loves This Underappreciated Bank Stock -- You Should Too
Warren Buffett is so enamored of Wells Fargo (WFC) - Get Report , it's now the second-largest holding in the portfolio of Berkshire Hathaway (BRK.A) - Get Report . Indeed, Berkshire recently applied to the Federal Reserve to expand its stake in the bank after reaching the 10% limit that requires regulatory review. Nonetheless, Brexit-rattled investors have been pushing down Wells Fargo shares.
Who do you think is right? Buffett (current net worth: $70.2 billion) or the skittish investment herd? Thought so.
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We wouldn't blame you for being leery of banks as a whole right now, but Wells Fargo stands out as a conspicuous buying opportunity. Below, we make our case for this all-weather, buy-and-hold gem. We also lift the curtain on an unorthodox but highly effective investment method that makes money in up and down markets.
San Francisco-based Wells Fargo is one of the best-managed banks in the world. With a rock-solid balance sheet and a history of prudent decision-making, Wells Fargo is a low-cost operator in what's increasingly becoming a commodity industry. During the fevered subprime mortgage machinations that precipitated the financial crisis of 2008, Wells Fargo largely kept its nose clean and avoided derivatives, a wise move that's holding it in good stead while its more reckless peers, notably Bank of America (BAC) - Get Report, still pay the price.
Buffett is the master of value investing, and he has long been a fan of Wells Fargo. Berkshire also holds stakes in Goldman Sachs (GS) - Get Reportand U.S. Bancorp (USB) - Get Report, but Wells Fargo continues to be Buffett's favored financial holding. Berkshire started acquiring Wells Fargo shares in 1989 and now holds a stake worth $23 billion. Buffett clearly views this bank's shares as a long-term moneymaking proposition.
Buffett's recent request to up his stake in Wells Fargo is a ringing endorsement, but traders still harbor lingering doubts. The unfolding chaos from Brexit will clobber banks, as Europe's financial hub of London tries to extricate itself from the EU. The possibility of tougher banking regulations if Hillary Clinton wins the White House is another fear. The benchmark Financial Select Sector SPDR Fund (XLF) - Get Report is down 5.75% year to date. Yet another concern is WFC's exposure to the indebted energy sector.
We think all of these worries are overblown.
From our view, Brexit will mostly hurt overextended overseas banks, not financially fit U.S.-based operators such as Wells Fargo. To be sure, Clinton belongs to the center-left of her party and she's been expropriating some of U.S. Senator Bernie Sanders' fiery antibanking rhetoric to appeal to his populist base. However, at the end of the day, Clinton is an "establishmentarian" who's strongly supported by Wall Street's big money donors. If she's elected (as current polls suggest), it's highly unlikely that she'll rock the financial sector's boat. And lastly, Well Fargo''s exposure to energy companies, a sector that's been reviving lately, is not nearly as onerous as that of rivals Bank of America and JPMorgan Chase (JPM) - Get Report.
WFC holds $1.85 trillion in assets, which it's been able to fund more cheaply than its peers because of its growing reservoir of low-cost deposits. The bank is a leader in mortgage lending, which is expanding as housing prices rise and the economic recovery chugs along. Wells Fargo's annualized return on assets (ROA) of 1.28% and return on equity (ROE) of 11.9% reflect consistently robust financial performance.
At the market open on Thursday, Wells Fargo shares traded at $46.65; the median 12-month price target from analysts who cover the company is $55, suggesting shares could gain 18%. The highest one-year price target is $64, implying a gain of 37.1%. The current dividend yield of 3.2% is icing on the cake.
And yet, Wells Fargo's shares are down 14% year to date and down 16% over the past 12 months. Unless you think billionaire super-investor Warren Buffet is dead wrong about Wells Fargo, now's an opportune time to buy shares.
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John Persinos is an editorial manager and investment analyst at Investing Daily. At the time of publication, the author held stock in Wells Fargo.