NEW YORK (TheStreet) -- Warren Buffett once described derivatives as financial weapons of mass destruction. I have wondered over his disdain for these classes of "fiscal engineering." However, if arguably the world's greatest investor holds these complicated financial instruments in contempt, everyday common investors should be wary.
For most people, the term "financial engineering" means simply earning a check from a 40-hour week and investing part of it in successful stocks. But sometimes, through even basic investments, people become victims of fallout from these "weapons" indirectly, when they invest in companies exposed to high risk attributable to derivatives.
This topic came to the forefront last week when investors learned that
in its synthetic credit portfolio since the end of the first quarter.
This announcement has forced investors to not only re-evaluate the state of our banking system, but from an investment perspective, it has also served to bring more scrutiny toward bank balance sheets in an effort to reassess risk and current valuations.
In my recent research one name that seems to standout from the rest is banking giant
coming in at a close second. Without adding additional "spin" Wells is now the safest bank on Wall Street and in my opinion it is now trading at a significant discount if for no other reason than for the peace of mind if offers in light of JPMorgan's news.
It is hard to say at this point if a banking franchise exists that exceeds the quality of management and credibility offered by Wells Fargo -- with one of the attractive qualities being that (unlike several of its peers) it is highly transparent and its books are easy to understand.
Furthermore, in a thorough appraisal of its fundamentals, investors will discover that not only is the bank remarkably unburdened by the associated risks stemming from a reliance on derivatives but, unlike names such as
or to a lesser extent
, it is also divested from investment banking, prop trading and, better still, the adversities of Europe.
The bank's slogan is "together we'll go far" and, again unlike several of its peers, it seems that it is committed to living up to this motto, with an intrinsic customer focus that has resulted in not only lower costs on deposits but also loan yields in excess of the industry average.
The bank's aggressiveness in capturing more of the potential business from its depositor base continues to set it apart from regional rivals such as
. That difference was even more apparent when
-- a report that included an increase in products per household to 5.98.
Wells reported a 13% increase in net income to $4.02 billion -- topping last year's number of $3.57 billion. Earnings per share grew 12% from last year's number of $0.67 to $0.75 -- also topping analysts' estimates of $0.73 per share. For the quarter, its pre-tax pre-provision profit grew by 14% on an annual basis to $8.64 billion -- this is also considered the total revenue less noninterest expense.
Total quarterly revenue grew 6% to $21.64 billion, topping not only last year's number of $20.33 billion but also beating analysts' estimates of $20.46 billion. Remarkably this growth comes despite the fact that it is still working to integrate and fully realize merger synergies from its acquisition of Wachovia.
While most banks can be appraised on similar standards and metrics, it is clear that Wells Fargo stands apart. Moreover, as investment risk -- particularly from the standpoint of derivatives becoming more of a topic of concern in light of JPmorgan's news, a premium will likely be placed on identifying banks with above-average growth prospects that still meets certain criteria of safety.
From an investment perspective, the stock is trading at a considerable discount relative to its peers from the standpoint of risk/reward outlook, making it the cheapest bank on the market.
At the time of publication, the author held no positions in any of the stocks mentioned.