Skip to main content

Doug Kass shares his views every day on RealMoneyPro. Click here for a real-time look at his insights and musings.

Avoid Wells Fargo

Originally published Sept. 15 at 8:43 a.m. EDT

"Everything we do is built on trust. It doesn't happen with one transaction, in one day on the job or in one quarter. It's earned relationship by relationship."

--Wells Fargo's Visions and Values

I promised several subscribers in the Comments Section that I would offer my views on Wells Fargo's (WFC) - Get Wells Fargo & Company Report shares and on its management.

The later will be a subject of a coming post that will include my reaction to CEO John Stumpf's weak defense on Jim "El Capitan" Cramer's "Mad Money" show. (Hint: The responsible members of senior management and of the board of directors should be forced out of the bank, post haste).

Let me distill my view on WFC stock into one word: avoid.

Wells Fargo's premium valuation is likely to be impaired over a period of time from the discovery of nearly two million fraudulent accounts.

I have never really understood the premium valuation of the bank. To be sure, Wells Fargo has a vast and dominant franchise and deposit base. It is involved in one out of every three mortgages in the U.S. But, given that over the last five years the company's pretax income (before loan loss provisions) has made no progress, others may now question that premium valuation.

Importantly, given the broad involvement of more than 5,000 employees, I would not be surprised if more untoward transactions were uncovered in discovery in the next several months, which would provide a further case for a contraction in the bank's valuation.

Bottom line, I would stick with Bank of America (BAC) - Get Bank of America Corp Report or Citigroup (C) - Get Citigroup Inc. Report if one is interested in exposure to the banking space.

And here is a contrary thought.

Given the size of Berkshire Hathaway's (BRK.B) - Get Berkshire Hathaway Inc. Class B Report Wells Fargo holdings (10% of the shares outstanding) and Buffett's previous comments over more than two decades regarding his confidence in the bank and its management, most believe that The Oracle will publicly support Stumpf and the management team sometime over the next few days/weeks.

I don't agree.

While I don't think Buffett will provide any indication that he will sell his stock (it's not his "style"), I do expect an uncommon and strong reprimand. I suspect that privately he is furious and, in the time ahead. I don't think Buffett will buy more or sell his WFC holdings. He will likely stand pat. (The sins of Salomon still likely lie in Warren's mind and thoughts.)

TheStreet Recommends

One final thought.

As I have clearly detailed in the last three years, it remains my view that Warren Buffett has lost his way in his investment portfolio as many of Berkshire's largest investment portfolio positions are moatless, "old economy" companies -- such as IBM (IBM) - Get International Business Machines Corporation Report , American Express (AXP) - Get American Express Company Report and Coca-Cola (KO) - Get Coca-Cola Company Report -- that have been consistent market underperformers.

From my perch, Wells Fargo is yet another one of the aforementioned old-economy company, as the now heavily regulated banking industry moves ever closer toward delivering a commoditized and non-differentiated product ... and lower returns on invested capital.

Position: Short BRK.B small, KO.

My Takeaways and Observations

Originally published Sept. 14 at 6:02 p.m. EDT

I met with three companies this morning; alas, all uninteresting from a research standpoint.

Fubar!

Apple (AAPL) - Get Apple Inc. Reportwas a star. I am short and got shorter Thursday. The momentum chasers who hated the shares at $103 now love them at $113 despite the technical resistance that appears above.

Chipotle (CMG) - Get Chipotle Mexican Grill, Inc. Report was a goat. I am long and got longer, but still small. At $405 to $410, I will get medium in size.

Twitter (TWTR) - Get Twitter, Inc. Report talk from Fast Company.

The day's trades.

It was an indecisive and drama-less market. There was some selling in futures after the close.

I wouldn't look too much into today's action and I wouldn't jump to too many conclusions. The close was a function of the last program standing.

Here are some great value-added contributions on our site:

    Jim "El Capitan" Cramer says demand is down but not out.

    Divine Ms M made another great call.

    "Cousin" Gary Morrow doesn't like Ford's technicals. And i don't like the company's fundamentals!

    Rev hates the macro monkeys.

    Tim "Not Judy or Phil" Collins on a balanced view.

    Position: Long DD, RDN, TWTR, CMG small, HIG; short SPY small, TLT, NFLX small, GM, F, DIS small, CAT small, K

    Action Alerts PLUS, which Cramer co-manages as a charitable trust, is long WFC, C, AAPL, SLB and AGN.

    At the time of publication, Kass and/or his funds were long/short XXX, although holdings can change at any time.

    Doug Kass is the president of Seabreeze Partners Management Inc. Under no circumstances does this information represent a recommendation to buy, sell or hold any security.