WFC - Wells Fargo

[ScottHall]

I like the fact that they have bragged for years about how great they are at cross selling products, and now it turns out they've been playing games. Who wants to bet there are more shoes to drop? Probably! Is the stock cheap? Based on the numbers, I'd say so. I still own my warrants.

 

The thing is with these things is you never know when the next shoe may drop, and how big of a deal that will be. I remember back with Ocwen; trading at a discount to runoff value. And one settlement basically ruined it.

 

Ocwen and Wells are different; Ocwen was always an unwinding asset whereas Wells does seem capable of growing organically. I don't think a bank this size can be built entirely on fraud. It's a SIFI. So what is the real damage going to be? For a company that can keep earning good returns on its capital while this unfolds, it's probably not so bad. That said, the price today is not super exciting to me. I like it. It'd probably be a market-beater if there was no scandal.

 

It may still be a market beater, it's just not the sort of return I expect for a scandal-clad entity. The valuation is compelling but not slobberingly so. Maybe a lot of people have similar opinions to me; probably more to come, but probably not the end of the world. Otherwise I think the stock would be down a lot more.

[Uccmal]

Anyone here who thinks they dont eat one or two years earnings over this is naive. 

 

That's $20b-$40b. Just a bit dramatic, no? Respectfully, I think you have listened to too much 'noise'.

 

Looking at the Whale and the 100 B paid out by BAC, 20 B by the end doesn't seem outlandish to me.  The Whale was egg on the face from an isolated event.  The two situations so far at Wells are much broader and have targeted the little guy, and there will may be more coming. 

 

I wouldn't buy more this stock right now.  Maybe later, but not now.  But As you say Schwab, I could be wrong. 

 

In addition to the fallout:

- just because Buffett owns this stock today doesnt mean its good value today

- banking is becoming tighter and tighter regulated with no end in sight and this event wont help

- interest rate compression is here for awhile and may get worse.

-to my knowledge Buffett wasn't buying - he needed the permission to go above 10% due to a shrinking overall share count

- Sometime sooner or later the US goes into recession.  My guess is by Shortly after the election. 

- Wells knows this is bad.  No other CEO of Stumpf's stature has given back his pay. 

 

Flame away all you want but dont buy the stock at 45.  The Whale presented a great opportunity to arbitrage because it was isolated and JPMs business was unaffected.  The Wells situation is already affecting its business. 

 

 

 

 

 

 

[Spekulatius]

I like the fact that they have bragged for years about how great they are at cross selling products, and now it turns out they've been playing games. Who wants to bet there are more shoes to drop? Probably! Is the stock cheap? Based on the numbers, I'd say so. I still own my warrants.

 

The thing is with these things is you never know when the next shoe may drop, and how big of a deal that will be. I remember back with Ocwen; trading at a discount to runoff value. And one settlement basically ruined it.

 

Ocwen and Wells are different; Ocwen was always an unwinding asset whereas Wells does seem capable of growing organically. I don't think a bank this size can be built entirely on fraud. It's a SIFI. So what is the real damage going to be? For a company that can keep earning good returns on its capital while this unfolds, it's probably not so bad. That said, the price today is not super exciting to me. I like it. It'd probably be a market-beater if there was no scandal.

 

It may still be a market beater, it's just not the sort of return I expect for a scandal-clad entity. The valuation is compelling but not slobberingly so. Maybe a lot of people have similar opinions to me; probably more to come, but probably not the end of the world. Otherwise I think the stock would be down a lot more.

 

I agree - A PE of 10x (roughly) for a now tainted bank is not a great entry. I do think there will be more shoes to drop, when the investigations and subpoenas begin to stir up dirt. For me, a decent entry would be in the mid 30's.

JPM traded close to tangible book, when he London whale incident occured. This issue with WFC is smaller in monetary terms, but larger in reputation as terms, as it affects far mor customers.

 

I am WFC customer and while they never opened an account for me (I hope), it was clear that they were pushing a lot unwanted products ( insurance, CC, savings accounts that didn't yield anything) to their customers. I declined them all, but it was quite annoying. LT damage to the reputation should not be underestimated. New customers will be harder to win and existing customers that are pissed off for another reason and are on her fence will be more likely to leave. Control systems will have to be implemented I avoid these issues going forward, which will be expensive as well. In addition, WFC will have to switch to a softer sell approach, which may cost them some revenue as well.

[TheAiGuy]

You know, I added a little at $45 a week or so ago and then thought better of it a couple days later and sold what I bought for roughly the same.

 

The price here is fine, but the game - looking for an entry point after a scandal on a stable, borring, easy to value stock - is terrible.

[DCG]

Shortly before this whole scandal broke, Barron's published this article which put their earnings in question:

 

 

http://www.barrons.com/articles/how-wells-fargo-dresses-up-its-earnings-1469857609

 

 

It seems like their leadership, which was often regarded as the best in the industry, is actually pretty shady.

 

 

Also, this:

 

 

Wells Fargo [/size](WFC)[/size] — Wells Fargo continues on our watch list after CEO John Stumpf faced four hours of grilling from a House of Representatives panel Thursday over the bank's sales practices scandal. CNBC has learned that Warren Buffett – whose Berkshire Hathaway[/size](BRK-A)[/size] is a major Wells Fargo shareholder – spoke with Stumpf about these issues but has not spoken with any other board members. Buffett told the CEO that the problem was bigger than Stumpf had thought and that he felt Stumpf's interview with CNBC's Jim Cramer did not go well.

[StubbleJumper]

Anyone here who thinks they dont eat one or two years earnings over this is naive. 

 

That's $20b-$40b. Just a bit dramatic, no? Respectfully, I think you have listened to too much 'noise'.

 

Looking at the Whale and the 100 B paid out by BAC, 20 B by the end doesn't seem outlandish to me.  The Whale was egg on the face from an isolated event.  The two situations so far at Wells are much broader and have targeted the little guy, and there will may be more coming. 

 

I wouldn't buy more this stock right now.  Maybe later, but not now.  But As you say Schwab, I could be wrong. 

 

In addition to the fallout:

- just because Buffett owns this stock today doesnt mean its good value today

- banking is becoming tighter and tighter regulated with no end in sight and this event wont help

- interest rate compression is here for awhile and may get worse.

-to my knowledge Buffett wasn't buying - he needed the permission to go above 10% due to a shrinking overall share count

- Sometime sooner or later the US goes into recession.  My guess is by Shortly after the election. 

- Wells knows this is bad.  No other CEO of Stumpf's stature has given back his pay. 

 

Flame away all you want but dont buy the stock at 45.  The Whale presented a great opportunity to arbitrage because it was isolated and JPMs business was unaffected.  The Wells situation is already affecting its business.

 

 

Al,

 

I don't think that anyone is flaming you.  If we are, please send us a PM...if I personally ever get too intensely involved in a discussion, a quick PM is appreciated to let me know to dial it back.  Rather, I would say that most of us are trying to figure out what economic impact this event might have on WFC and whether its value will be impaired on a long-term basis or whether this is a minor event after which WFC returns to being a best of class bank.  If it's the former, then you are probably right when recommending that people look for a share price entry point in the $30s.  If the damage is minor, then the current price probably represents an attractive entry point (ie, buy a best in class bank for 10X).

 

So far Mr. Market has given WFC's market cap a haircut of about $30B over the past month.  So, is Mr. Market correct that the long-term economic damage to WFC will be $30B.  Certainly that's not too far from your back-of-envelope estimate of a year of EPS.  However I think that's maybe a bit pessimistic.  So, let's sum up the potential losses, understanding that we probably won't be comprehensive (ie, there'll be new lawsuits come out of the wood work) :

 

Fines: $200m (these have already been announced)

Employee class action lawsuit: $7,200m (this has already been announced)

Client Arbitration: $200m (this assumes that WFC needs to return service charges to 200k clients and it costs $1k each to pay/administer)

Client class action: $1B (probably cannot even get a class certified, but this is for 1m clients who paid $1k each in higher interest due to worsened credit scores)

Lost government business: $300m (assumes a few more states/municipalities follow California's lead and suspend business for a year)

Lost clients: nil (assumes that virtually no clients will walk, and those who walk are not high profit clients)

 

 

So, off the top of my head, I can envision perhaps $9B of direct costs, plus reputation damage, plus the requirement for excessive management conservatism on a going-forward basis.  And, even the $9B of direct costs assumes that classes can be certified, that the complainants will win in court, that WFC will not win any appeals, and that the settlement will remain undiscounted (ie, if that $7.2B settlement isn't paid until 2027 after the trial and after 12 different appeals, then the discounted value is much smaller).

 

Does the potential $9B in pre-tax direct costs plus the indirect costs justify a $30B haircut to market cap?  Or are there other items to add to the list of potential economic impacts?

 

 

SJ

[KCLarkin]

Shortly before this whole scandal broke, Barron's published this article which put their earnings in question:

 

One counterpoint: they have about $1B per year in non-cash, non-economic amortization of "core deposits" that ends in 2018. I don't think that is factored into Barron's analysis.

[DCG]

Shortly before this whole scandal broke, Barron's published this article which put their earnings in question:

 

One counterpoint: they have about $1B per year in non-cash, non-economic amortization of "core deposits" that ends in 2018. I don't think that is factored into Barron's analysis.

 

 

Selling assets just to meet Wall Street's EPS target is the main thing that stands out to me though.

[Uccmal]

Anyone here who thinks they dont eat one or two years earnings over this is naive. 

 

That's $20b-$40b. Just a bit dramatic, no? Respectfully, I think you have listened to too much 'noise'.

 

Looking at the Whale and the 100 B paid out by BAC, 20 B by the end doesn't seem outlandish to me.  The Whale was egg on the face from an isolated event.  The two situations so far at Wells are much broader and have targeted the little guy, and there will may be more coming. 

 

I wouldn't buy more this stock right now.  Maybe later, but not now.  But As you say Schwab, I could be wrong. 

 

In addition to the fallout:

- just because Buffett owns this stock today doesnt mean its good value today

- banking is becoming tighter and tighter regulated with no end in sight and this event wont help

- interest rate compression is here for awhile and may get worse.

-to my knowledge Buffett wasn't buying - he needed the permission to go above 10% due to a shrinking overall share count

- Sometime sooner or later the US goes into recession.  My guess is by Shortly after the election. 

- Wells knows this is bad.  No other CEO of Stumpf's stature has given back his pay. 

 

Flame away all you want but dont buy the stock at 45.  The Whale presented a great opportunity to arbitrage because it was isolated and JPMs business was unaffected.  The Wells situation is already affecting its business.

 

 

Al,

 

I don't think that anyone is flaming you.  If we are, please send us a PM...if I personally ever get too intensely involved in a discussion, a quick PM is appreciated to let me know to dial it back.  Rather, I would say that most of us are trying to figure out what economic impact this event might have on WFC and whether its value will be impaired on a long-term basis or whether this is a minor event after which WFC returns to being a best of class bank.  If it's the former, then you are probably right when recommending that people look for a share price entry point in the $30s.  If the damage is minor, then the current price probably represents an attractive entry point (ie, buy a best in class bank for 10X).

 

So far Mr. Market has given WFC's market cap a haircut of about $30B over the past month.  So, is Mr. Market correct that the long-term economic damage to WFC will be $30B.  Certainly that's not too far from your back-of-envelope estimate of a year of EPS.  However I think that's maybe a bit pessimistic.  So, let's sum up the potential losses, understanding that we probably won't be comprehensive (ie, there'll be new lawsuits come out of the wood work) :

 

Fines: $200m (these have already been announced)

Employee class action lawsuit: $7,200m (this has already been announced)

Client Arbitration: $200m (this assumes that WFC needs to return service charges to 200k clients and it costs $1k each to pay/administer)

Client class action: $1B (probably cannot even get a class certified, but this is for 1m clients who paid $1k each in higher interest due to worsened credit scores)

Lost government business: $300m (assumes a few more states/municipalities follow California's lead and suspend business for a year)

Lost clients: nil (assumes that virtually no clients will walk, and those who walk are not high profit clients)

 

 

So, off the top of my head, I can envision perhaps $9B of direct costs, plus reputation damage, plus the requirement for excessive management conservatism on a going-forward basis.  And, even the $9B of direct costs assumes that classes can be certified, that the complainants will win in court, that WFC will not win any appeals, and that the settlement will remain undiscounted (ie, if that $7.2B settlement isn't paid until 2027 after the trial and after 12 different appeals, then the discounted value is much smaller).

 

Does the potential $9B in pre-tax direct costs plus the indirect costs justify a $30B haircut to market cap?  Or are there other items to add to the list of potential economic impacts?

 

 

SJ

 

Stubble, I wasn't really serious about the flaming, and I really respect your views.  I just think there may be much better entry points going forward. 

 

A minor recession would likely take all the big banks down.  Whether I would even buy WFC at any price is another matter, and nothing to do with the scandal(s).  It has more to with BAC, WFC, JPM, et al, being regulated utilities in an unprotected market.  This differs markedly from the Canadian banks which are regulated within an Oligopoly.  In a recession such as the one last fall/winter in Canada I would buy Cdn, and did buy some Rbc. 

 

I am very careful to cap my holdings in the financial sector in general though.  I sort of learned this with BAC.  The initial bounce back was where all the money was made.  I kept on keeping on with it for 3 more years and began to see the writing on the wall.  The government has turned these companies into utilities, and pretty much dictates their behaviour.  That, and the persistent low interest rate environment has forced them to get creative, with unfortunate results. 

 

Going back in the BAC threads on this board sort of illustrates what I am talking about.  We (including me) had estimates of $2-$3 per share earnings by now, and a stock price in the mid $20s at some point.  This was predicated on getting their problems behind them (which they did), and much higher interest rates by now.  It has become clear that low interest rates will last for a while yet, perhaps for our lifetimes, making it harder for these huge banks to grow earnings, or even keep them from dropping.  With the government leash (right or wrong) on for the foreseeable future you have another handicap. 

 

Summary: Downside significant; upside limited. 

 

 

 

[rb]

Al,

 

I happen to have almost the opposite view regarding US/Canadian banking situation. While the Canadian banking oligopoly has been good for banks' profitability you effectively have a banking oligopoly in the US right now with WFC, BAC, JPM, and C.

 

A lot has been made about the regulation of US banks and making them more utility like. I actually kinda like that. Banks have been utility like in the past and their shareholders have done very well. A lot of the stuff that was regulated away wasn't really that good for shareholders in the end. Though it was good for banker bonuses. It's true that the new regulations have reduced ROEs for US banks but the multiples are also lower and it compensates for that. The returns thus shouldn't be impacted that much. So you have a lower risk situation for similar returns. It's more boring but I'm ok with that. I don't like too much excitement in my holdings.

 

The economics are different now. The Canadian consumer is way overlevered, the US consumer has been delevering for 8 years now. The home ownership rate in Canada is at record high while the home ownership rate in the US is at 50 year low. US is more likely to raise rates rather than cut, the opposite is true in Canada. It looks to me that in terms of loan growth Canadian banks are running out of runway while in the US you a spring that gets coiled up and when it gets released you'll get some decent growth. I'm ok with a decent dividend while I wait.

 

My last point is more of a feel, but I think that the balance sheets in the US have been mostly cleaned up while I read a lot about mortgage fraud in Canada so I don't feel 100% confident about those balance sheets.

[SmallCap]

Hmm, If I stole (repossessed) your car, I would likely spend time in prison but Wells Fargo is allowed to give them back their car and 10K as punishment. I wonder how many unincorporated car thieves would take that kind of a system.

 

Brings an interesting question of how corporations are held accountable for breaking the law. Should a person be held accountable for what the company did or what they did while following orders by the corporation. Is the corporation paying a fine enough of a deterrent for them committing a crime?

 

http://money.cnn.com/2016/09/29/news/wells-fargo-servicemembers-cars/index.html

[Mephistopheles]

Illionis suspends WFC from muni business and "investment work"

 

http://www.bloomberg.com/news/articles/2016-09-30/illinois-to-suspend-wells-fargo-from-bond-investing-work

[Grenville]

This exchange from the Financial Services Hearing makes me wonder what Stumpf does all day. He literally doesn't know how things are run at WFC. It's almost like they need to put him on Undercover Boss.

 

 

Stumpf rebuttal during this whole crisis is that 99% of WFC people do the right thing and that they follow the culture and values. If you listen to his testimony when they ask him how things work, he doesn't know. So how would he know if they follow the cultures and values, I guess someone told him they do. His answers are: "It's run by that division, I don't know but I can get back to you…I will get our people on it…" Then when it comes to his role as CEO/Chairman, he's answers "its a board process or handled by that committee regarding clawbacks…" He doesn't own anything and isn't responsible for anything directly.

 

I know this a political event before elections, but some of the congressmen/women are asking real questions.

 

If he doesn't get canned fast and the CEO/Chairman role split, things are not going to get fixed. The board seems to be clueless so far. Where is the activist?

 

I look forward to hearing from Buffett and Munger on Stumpf's performance and what needs to be done.

[Foreign Tuffett]

This exchange from the Financial Services Hearing makes me wonder what Stumpf does all day. He literally doesn't know how things are run at WFC. It's almost like they need to put him on Undercover Boss.

 

Thanks for the link. He does seem somewhat clueless about how the retail branches were run. Keep in mind though, that he is likely intentionally playing dumb so as to ensure that he doesn't inadvertently implicate himself.

[Ballinvarosig Investors]

http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/2016/09/28/20160929_wells1.jpg

[Ballinvarosig Investors]

I wouldn't buy more this stock right now.  Maybe later, but not now.  But As you say Schwab, I could be wrong. 

 

In addition to the fallout:

- just because Buffett owns this stock today doesnt mean its good value today

- banking is becoming tighter and tighter regulated with no end in sight and this event wont help

- interest rate compression is here for awhile and may get worse.

-to my knowledge Buffett wasn't buying - he needed the permission to go above 10% due to a shrinking overall share count

- Sometime sooner or later the US goes into recession.  My guess is by Shortly after the election. 

- Wells knows this is bad.  No other CEO of Stumpf's stature has given back his pay. 

I disagree. I think if you're buying today for $44, then you've got a 95% chance of out-performing the market in the next 3 years.

 

My comments to your points (in bold).

 

- just because Buffett owns this stock today doesnt mean its good value today - you don't need Buffett to see this is value. You're buying at 11x earnings, there is moderate growth, book value/ROE growing at 11-12% a year, share buy backs. It's value in plain sight.

- banking is becoming tighter and tighter regulated with no end in sight and this event wont help - WFC already meet tight Basel 3 regulations. We are already in the most prudent regulatory environment for decades, I don't see further tightening.

- interest rate compression is here for awhile and may get worse. - We've already passed the bottom of the rate cycle, we're only going up from here.

-to my knowledge Buffett wasn't buying - he needed the permission to go above 10% due to a shrinking overall share count - he's not selling either!

- Sometime sooner or later the US goes into recession.  My guess is by Shortly after the election. - noise

- Wells knows this is bad.  No other CEO of Stumpf's stature has given back his pay.  - Warren is pissed, I have do doubt about that. But if Wells' transgressions had been that bad, then Stumpf would have been fired by now. He hasn't, only been given a slap on the wrist, this is important.

 

If it wasn't for the fact that the banking industry is despised right about now, Wells would be trading at about $60, yet here we are with a share price that is down 25% of that value. As I've looked at Wells closer in the last week (it's always been too expensive for me), I realise I have to take back the comment I said a few pages back where I wanted to buy cheaper. Whether I buy it at $44 or $40, it's still cheap. Conservatively speaking, at $44 today, I cannot see anything less than a 15% annual return over the next 5 years, that's doubling your money over that time period. The best thing about it is that you can let Uncle Warren do all the work. Like a Coca-Cola or an American Express, Uncle Warren just isn't allowed walk away from this one, he simply has to get it back on track.

 

Uccmal, let me put it to you this way. Would you be prepared to take a $100 bet to the charity of the winners choice that Wells doesn't provide a 100% return from today's price? I think you'd be nuts to take that bet and if you think so too, then why aren't you buying WFC now?

[muscleman]

I wouldn't buy more this stock right now.  Maybe later, but not now.  But As you say Schwab, I could be wrong. 

 

In addition to the fallout:

- just because Buffett owns this stock today doesnt mean its good value today

- banking is becoming tighter and tighter regulated with no end in sight and this event wont help

- interest rate compression is here for awhile and may get worse.

-to my knowledge Buffett wasn't buying - he needed the permission to go above 10% due to a shrinking overall share count

- Sometime sooner or later the US goes into recession.  My guess is by Shortly after the election. 

- Wells knows this is bad.  No other CEO of Stumpf's stature has given back his pay. 

I disagree. I think if you're buying today for $44, then you've got a 95% chance of out-performing the market in the next 3 years.

 

My comments to your points (in bold).

 

- just because Buffett owns this stock today doesnt mean its good value today - you don't need Buffett to see this is value. You're buying at 11x earnings, there is moderate growth, book value/ROE growing at 11-12% a year, share buy backs. It's value in plain sight.

- banking is becoming tighter and tighter regulated with no end in sight and this event wont help - WFC already meet tight Basel 3 regulations. We are already in the most prudent regulatory environment for decades, I don't see further tightening.

- interest rate compression is here for awhile and may get worse. - We've already passed the bottom of the rate cycle, we're only going up from here.

-to my knowledge Buffett wasn't buying - he needed the permission to go above 10% due to a shrinking overall share count - he's not selling either!

- Sometime sooner or later the US goes into recession.  My guess is by Shortly after the election. - noise

- Wells knows this is bad.  No other CEO of Stumpf's stature has given back his pay.  - Warren is pissed, I have do doubt about that. But if Wells' transgressions had been that bad, then Stumpf would have been fired by now. He hasn't, only been given a slap on the wrist, this is important.

 

If it wasn't for the fact that the banking industry is despised right about now, Wells would be trading at about $60, yet here we are with a share price that is down 25% of that value. As I've looked at Wells closer in the last week (it's always been too expensive for me), I realise I have to take back the comment I said a few pages back where I wanted to buy cheaper. Whether I buy it at $44 or $40, it's still cheap. Conservatively speaking, at $44 today, I cannot see anything less than a 15% annual return over the next 5 years, that's doubling your money over that time period. The best thing about it is that you can let Uncle Warren do all the work. Like a Coca-Cola or an American Express, Uncle Warren just isn't allowed walk away from this one, he simply has to get it back on track.

 

Uccmal, let me put it to you this way. Would you be prepared to take a $100 bet to the charity of the winners choice that Wells doesn't provide a 100% return from today's price? I think you'd be nuts to take that bet and if you think so too, then why aren't you buying WFC now?

 

California and Illinois banned WFC from muni bond issuance. Reminds me of Solomon brothers being banned from its treasury bidding. Of course the scale is not that big.

What else could happen here? I want to find out the worst case scenario.

 

 

 

 

 

[rb]

The worst case scenario would be if the government decides to make an example out of Wells and unleashes DOJ on them. They you're looking at Billion level fines and huge legal fees. I don't think it'll come to that.

[Mephistopheles]

Last year, WFC's total noninterest income from both equity and debt underwriting fees was $1.6 billion. This doesn't include expenses and does includes both corporate and municipality. With a total net income upwards of $20 billion, wiping out the entire muni business is not a big deal.

 

I do think we will see a DOJ investigation and other lawsuits (few which have already been filed), and it may be several billion in settlements, but nothing close to BAC or JPM crisis era settlements. Really, how much harm was done here?? Life will go on and WFC will continue to be a quality bank.

[Guest wellmont]

this post explains why wfc is extremely cheap right now (if you think earings won't be hit much at all by this as I do). by my measure wfc is trading at north of 15% pre tax earnings yield on a Trailing basis. that yield on your cost basis is only going to grow.

 

http://brooklyninvestor.blogspot.com/2013/07/13-and-15-pretax-returns-now.html

[Guest wellmont]

this extremely worrisome and bearish article (the kind the ms financial media is known for) was written a few weeks before the bottom in jpm stock during london whale scandal. the stock has doubled since the article was published in a bit more than 4 years.

 

http://www.reuters.com/article/us-jpmorgan-risk-idUSBRE84H15120120518

[Spekulatius]

this post explains why wfc is extremely cheap right now (if you think earings won't be hit much at all by this as I do). by my measure wfc is trading at north of 15% pre tax earnings yield on a Trailing basis. that yield on your cost basis is only going to grow.

 

http://brooklyninvestor.blogspot.com/2013/07/13-and-15-pretax-returns-now.html

 

A lot of banks trade at 15% pretax earnings yield, which means a PE of 10-11. BAC, GS etc. I don't think that this is cheap given that WFC got a bit "smelly" and we are so far in the bull market. Rising interest rates could help, but then on the other side, provision for credit etc are very low and normalized will go higher - probably much higher in a recession.

[muscleman]

this post explains why wfc is extremely cheap right now (if you think earings won't be hit much at all by this as I do). by my measure wfc is trading at north of 15% pre tax earnings yield on a Trailing basis. that yield on your cost basis is only going to grow.

 

http://brooklyninvestor.blogspot.com/2013/07/13-and-15-pretax-returns-now.html

 

Why care about pre tax earnings instead of after tax earnings?

[rb]

PE does it's stuff pre tax because they're more interested in operating cash flow that can be used to service debt. Also taxes aren't that big an issue for PE because the interest expense on the large debt loads eliminate a large part of tax liability.

[muscleman]

this extremely worrisome and bearish article (the kind the ms financial media is known for) was written a few weeks before the bottom in jpm stock during london whale scandal. the stock has doubled since the article was published in a bit more than 4 years.

 

http://www.reuters.com/article/us-jpmorgan-risk-idUSBRE84H15120120518

 

The stock price increase was far more than the EPS increase.

JPM was 7x PE in 2012. That's a no brainer at that time.

WFC at 11x PE isn't such a no brainer.

 

Buffet loves WFC at 10x pretax PE because Berkshire is so big now and there is no other great ways of making money.

He used to be buying 2x PEs when he first started and he was making 29% a year after fees for the first ten years.