WFC - Wells Fargo

[FCharlie]

WFC's cumulative net income between 2015-2019 was $109 billion. Their average net income was $21.8 billion during these five years. As recently as last last month, WFC's market cap was $95 billion, or five times what they might be expected to earn in any normal year. No consideration given to buybacks being resumed, loan loss reserves being released, the asset cap being lifted, or NIM ever rising again.

 

Sometimes stocks get so cheap and so hated that they can rise 40% in a month and still be dirt cheap. WFC is one of those stocks.

 

 

[vince]

WFC's cumulative net income between 2015-2019 was $109 billion. Their average net income was $21.8 billion during these five years. As recently as last last month, WFC's market cap was $95 billion, or five times what they might be expected to earn in any normal year. No consideration given to buybacks being resumed, loan loss reserves being released, the asset cap being lifted, or NIM ever rising again.

 

Sometimes stocks get so cheap and so hated that they can rise 40% in a month and still be dirt cheap. WFC is one of those stocks.

 

Great post, I feel mostly the same way except for a couple points.  NIM most certainly averaged at a higher spread than exists now so either you give their earning power a haircut or remove it from being a future freebie.  Secondly, it bothers me that Buffett sold his whole position AT VERY CHEAP PRICES.  Now I am at least a decade past the point of following Buffett into stocks and it looks almost certain to me that their earning power is well north of 15 billion under all reasonable circumstances.  But he must see something that he REALLY DOESNT LIKE.  I think he's nuts for selling them at those prices but he is the best banking analyst there is.

[Cardboard]

"I think he's nuts for selling them at those prices but he is the best banking analyst there is."

 

First part is correct, second one not so much.

 

I mean, the time to sell WFC was when everybody loved it. At that point it was trading high and at a premium to other banks despite still being a commodity business. Back then I was into BAC.

 

Same error with airlines. It had become a different business, more consolidated, like railroads, much less impacted by recession. LMAO!

 

Then he dumped the shares at the absolute bottom... Just like with WFC.

 

Then he retains a massive stake in a hand held device company trading at 37 times earnings and $2.1 trillion market cap.

 

The guy is just nuts! Being bailed by low cost capital or float which is free leverage.

 

Cardboard

[Viking]

"I think he's nuts for selling them at those prices but he is the best banking analyst there is."

 

First part is correct, second one not so much.

 

I mean, the time to sell WFC was when everybody loved it. At that point it was trading high and at a premium to other banks despite still being a commodity business. Back then I was into BAC.

 

Same error with airlines. It had become a different business, more consolidated, like railroads, much less impacted by recession. LMAO!

 

Then he dumped the shares at the absolute bottom... Just like with WFC.

 

Then he retains a massive stake in a hand held device company trading at 37 times earnings and $2.1 trillion market cap.

 

The guy is just nuts! Being bailed by low cost capital or float which is free leverage.

 

Cardboard

 

The key question is: What is Buffet trying to achieve at Berkshire? What are his goals? When you answer this you can then evaluate his decisions and portfolio returns.

 

I think Buffet is running Berkshire more like a trust these days. Preservation of capital is much more important to him then return. The pandemic was new news to everyone. He may have decided in April that he needed to reduce Berkshire's exposure to financials. Who do you sell? WFC is the easy rational choice.

 

What did he buy a chunk of? A collection of big pharma, BRK and a pipeline. Not an unreasonable trade (when looked at from a total portfolio perspective and over the long term).

 

Due to how Buffet is now managing the company my take-away is BRK will, moving forward, outperform bonds but underperform the S&P 500.

 

PS: perhaps the pandemic was not the reason Buffet felt it necessary to dramatically shrink BRK's exposure to financials... there are also a couple of other very good reasons to do so if you are trying to build a company that will be around for the descendants of long term shareholders in another 50 or even 100 years (think about how debt bubbles usually end... not well :-).

[vince]

"I think he's nuts for selling them at those prices but he is the best banking analyst there is."

 

First part is correct, second one not so much.

 

I mean, the time to sell WFC was when everybody loved it. At that point it was trading high and at a premium to other banks despite still being a commodity business. Back then I was into BAC.

 

Same error with airlines. It had become a different business, more consolidated, like railroads, much less impacted by recession. LMAO!

 

Then he dumped the shares at the absolute bottom... Just like with WFC.

 

Then he retains a massive stake in a hand held device company trading at 37 times earnings and $2.1 trillion market cap.

 

The guy is just nuts! Being bailed by low cost capital or float which is free leverage.

 

Cardboard

 

Me personally, I wouldn't confidently second guess the maestro and he is most definitely the best banking analyst there is.  He doesn't look at price the same way most do.  I'm sure he understood that there was a good chance he could have sold those stocks at higher prices going forward but when he sees something he doesn't like, he dumps the position.  He has commented on this part of his process before.  His record across decades of every economic condition is incredible.  And when I say he is the best analyst I mean he understands the financial statements incredibly well which gives him insights that most (including me) can only dream about. 

[vince]

"I think he's nuts for selling them at those prices but he is the best banking analyst there is."

 

First part is correct, second one not so much.

 

I mean, the time to sell WFC was when everybody loved it. At that point it was trading high and at a premium to other banks despite still being a commodity business. Back then I was into BAC.

 

Same error with airlines. It had become a different business, more consolidated, like railroads, much less impacted by recession. LMAO!

 

Then he dumped the shares at the absolute bottom... Just like with WFC.

 

Then he retains a massive stake in a hand held device company trading at 37 times earnings and $2.1 trillion market cap.

 

The guy is just nuts! Being bailed by low cost capital or float which is free leverage.

 

Cardboard

 

The key question is: What is Buffet trying to achieve at Berkshire? What are his goals? When you answer this you can then evaluate his decisions and portfolio returns.

 

I think Buffet is running Berkshire more like a trust these days. Preservation of capital is much more important to him then return. The pandemic was new news to everyone. He may have decided in April that he needed to reduce Berkshire's exposure to financials. Who do you sell? WFC is the easy rational choice.

 

What did he buy a chunk of? A collection of big pharma, BRK and a pipeline. Not an unreasonable trade (when looked at from a total portfolio perspective and over the long term).

 

Due to how Buffet is now managing the company my take-away is BRK will, moving forward, outperform bonds but underperform the S&P 500.

 

PS: perhaps the pandemic was not the reason Buffet felt it necessary to dramatically shrink BRK's exposure to financials... there are also a couple of other very good reasons to do so if you are trying to build a company that will be around for the descendants of long term shareholders in another 50 or even 100 years (think about how debt bubbles usually end... not well :-).

 

Great post and I have thought about his goal of capital preservation and believe that is exactly right.  Berkshire is not the company to make you rich but it's probably the best for the certainty of staying rich.  But I would disagree about underperforming the S&P going forward.  The multiple of book value for the S&P is way higher than Berkshire's, yet return on equity is similar despite having very little debt. Eventually the gap in book value multiples should tighten and is a big reason why Berkshire has underperformed.  Last I checked Brk was still growing net worth at a faster pace than the S&P, eventually that has to show up in the price. The gap cannot grow forever.

[CorpRaider]

He has been really wrong on wells for a long time, but I think he is very likely to have similar upside in bac with likely fewer bad downside scenarios and definitely fewer hot potato questions from the media.  Was November the best month ever for bank stocks?  I thought I saw that somewhere.

[Mephistopheles]

He's going to 25% stake in BofA right? Did the Fed make him sell WFC and JPM?

[DooDiligence]

I know this has already been posted but nothing's changed since the interview, including Warrens' mind.

 

www.cnbc.com/video/2020/02/24/watch-cnbcs-full-interview-with-berkshire-hathaway-ceo-warren-buffett.html

 

Personally, I think he's throwing the baby out with the bath water.

[Peregrine]

Warren has always gravitated to the highest quality business that he can understand. Makes sense why he's selling out of Wells to buy more B of A. Incidentally, it's kind of ironic how these two banks have kind of switched places.

[Cardboard]

Stress baby! Lol! Catching!

 

https://finance.yahoo.com/quote/WFC/

 

Cardboard

[Sullivcd]

About to get angry

[Sullivcd]

Unfortunately they can only buy back about 1.5b by my math. For now at least.

[Parsad]

Unfortunately they can only buy back about 1.5b by my math. For now at least.

 

The good thing is that if they've taken their hits on future loan losses, 2021 should look more like another normal year.  As each quarter goes by, their income will be more normalized in the subsequent four quarters, gradually increasing their dividend and buyback capacity.  Let's hope the stock stays below $40 long enough for them to buy back a lot of shares in 2021.  And if it shoots back to $50...you win anyways!  Cheers!

[CorpRaider]

Yeah I could see big reserve releases in 2nd half.  Wonder what kind of gains they will book on asset management and private student loan sales...saw reports of estimated ~4.5 bils for AM.

 

Wells announced former head of BofA digital as new digital platform mgr on friday.  I tweeted an interview she did with cramer back then (2018).  From what I can tell she left BofA to "spend more time with family," but ended up @ boston consulting.  Is credited with intro of ERICA, and big BofA digital growth, but I wonder why she really left.

[lnofeisone]

Wells announced former head of BofA digital as new digital platform mgr on friday.  I tweeted an interview she did with cramer back then (2018).  From what I can tell she left BofA to "spend more time with family," but ended up @ boston consulting.  Is credited with intro of ERICA, and big BofA digital growth, but I wonder why she really left.

 

She hardly ended up at BCG. She was a senior advisor (technically MD-equivalent), so a consultant for BCG.  Most likely on a retainer and paid hourly fee. This is a pretty standard arrangement for C-suite exists and these usually have a fixed shelf life which is what it looks like here.

 

Check out Christian Kitchell on BofA and ERICA. BofA is better off without Moore and, in my book, this is a mediocre hire by Wells.

[DooDiligence]

Yeah I could see big reserve releases in 2nd half.  Wonder what kind of gains they will book on asset management and private student loan sales...saw reports of estimated ~4.5 bils for AM.

 

Wells announced former head of BofA digital as new digital platform mgr on friday.  I tweeted an interview she did with cramer back then (2018).  From what I can tell she left BofA to "spend more time with family," but ended up @ boston consulting.  Is credited with intro of ERICA, and big BofA digital growth, but I wonder why she really left.

 

It'll be interesting to see what they get for $10B in student loans.

It will be even more interesting to see what they do with the proceeds.

This article touts an average FICO score of 768 on the portfolio.

Seems kind of high for young students with short histories.

Do cosigners factor into these FICO scores?

 

Either way, seems like a good move, especially if the "free tuition" thing gets traction.

 

www.bloomberg.com/news/articles/2020-12-19/wells-fargo-to-sell-student-loan-book-to-apollo-blackstone

[LC]

She hardly ended up at BCG. She was a senior advisor (technically MD-equivalent), so a consultant for BCG.  Most likely on a retainer and paid hourly fee. This is a pretty standard arrangement for C-suite exists and these usually have a fixed shelf life which is what it looks like here.

 

This is how most senior mgmt is filled at the banks. It's a rotating crew of consultants, then FTE, then back to consulting, back to FTE...etc...its how I got my start back in the day :P

[CorpRaider]

Hmmm, yeah so she left for some reason and did that to stay engaged/as a placeholder.  That's kind of what I meant, wonder why she left with no landing pad...maybe it really was a family thing...of course, always skeptical of that explanation.

 

She's a good interview/speaker of the English language (especially for a BofA exec). Doesn't seem like tech savant, just a 15 year BofA vet, econ degree.  Scharf may know his way around those guys from visa days.

 

 

[lnofeisone]

Hmmm, yeah so she left for some reason and did that to stay engaged/as a placeholder.  That's kind of what I meant, wonder why she left with no landing pad...maybe it really was a family thing...of course, always skeptical of that explanation.

 

She's a good interview/speaker of the English language (especially for a BofA exec). Doesn't seem like tech savant, just a 15 year BofA vet, econ degree.  Scharf may know his way around those guys from visa days.

 

I went back and rewatched the interview. I was not impressed then and I'm still not impressed. She has no human-centered design expertise, CS/systems knowledge, or AI/ML. I suspect she was a politically savvy project manager with a mantra of "let's focus on the customer." Judging by the components that BofA is rolling out in Erica, it definitely looks like there is a clear roadmap. I wonder how much Moore contributed to that roadmap and if her lack of skills in this area is what diminished her career star (there was another thread which I'll try to find but basically pure MBAs are having a harder time these days because technies are slowly moving into management).

 

Don't get me wrong, she is an accomplished exec but I do think she is being hired because she was with BofA when the tunnel was very dark and here she can do a fair amount for WFC.

[CorpRaider]

Yeah, would be cooler if it was some hotshot, former TA at Stanford via goog.  She did savage Jim with a boomer joke that sailed right over his head.  Puts her in top 1% of BAC execs in my book.

[DooDiligence]

Not sure if this is the reason WFC is up today?

 

www.bloomberg.com/news/articles/2021-01-04/wells-fargo-to-expand-investment-bank-in-scharf-s-strategy-shift

[winjitsu]

Not sure if this is the reason WFC is up today?

 

www.bloomberg.com/news/articles/2021-01-04/wells-fargo-to-expand-investment-bank-in-scharf-s-strategy-shift

 

So far the score is out of student loans, asset management, credit cards, and expanding their IBD. I think going into IBD is a net-negative and shows Scharf's Wall Street envy.

 

Story is always the same for these firms trying to break in... try to get in when the market is ultra hot, stay perennially in mid-bottom of the league table, in 10 years time say that IBD results are too volatile and masking profitability of underlying business, divest or exit. 

 

See Amex/SLS, KKR, Citadel, Nomura, DB, UBS etc etc

[Parsad]

Not sure if this is the reason WFC is up today?

 

www.bloomberg.com/news/articles/2021-01-04/wells-fargo-to-expand-investment-bank-in-scharf-s-strategy-shift

 

So far the score is out of student loans, asset management, credit cards, and expanding their IBD. I think going into IBD is a net-negative and shows Scharf's Wall Street envy.

 

Story is always the same for these firms trying to break in... try to get in when the market is ultra hot, stay perennially in mid-bottom of the league table, in 10 years time say that IBD results are too volatile and masking profitability of underlying business, divest or exit. 

 

See Amex/SLS, KKR, Citadel, Nomura, DB, UBS etc etc

 

They should just buy Jefferies.  Wells gets a great IB management team and a terrific mid-size investment bank ready to grow, but one that understands operating and economic risk.  Cheers!

[Broeb22]

Not sure if this is the reason WFC is up today?

 

www.bloomberg.com/news/articles/2021-01-04/wells-fargo-to-expand-investment-bank-in-scharf-s-strategy-shift

 

So far the score is out of student loans, asset management, credit cards, and expanding their IBD. I think going into IBD is a net-negative and shows Scharf's Wall Street envy.

 

Story is always the same for these firms trying to break in... try to get in when the market is ultra hot, stay perennially in mid-bottom of the league table, in 10 years time say that IBD results are too volatile and masking profitability of underlying business, divest or exit. 

 

See Amex/SLS, KKR, Citadel, Nomura, DB, UBS etc etc

 

Do you think Scharf sees IB as a capital-light business (at least some parts of it are) that he can grow while under an asset cap?