Author: Felix Tong
Covestor model: Long Term Core Holdings
Disclosure: Long WFC
In the month of June there was one change to the Long Term Core Holdings portfolio. The volatility in the month provided a brief opening where I was able to initiate a position in Wells Fargo (NYSE: WFC) with an attractive valuation against intrinsic value as I calculate it.
WFC is one of the largest banks in North America, with the majority of its revenues derived from traditional banking activities, such as lending, rather than through activities such as propriety trading. WFC’s growth strategy is focused primarily on cross selling products to existing customers, and traditionally they have been very successful with this.
The main concern many observers have with WFC has been the bad assets that were taken on during the Wachovia merger. Wells quickly wrote down the worst of these assets immediately following the merger. The 2010 annual report mentions that the remaining assets in this category have been performing better than expected.
Another less publicized concern is Wells’ recent profitability. Due to government actions, the spread between the interest expenses WFC incurs for deposits and the interest income it obtains from loans has been near record highs. As QE2 ends there is a concern that this spread will shrink. This is a very real concern and I have normalized the interest rate spread in my intrinsic value calculation to take this into account.
My WFC purchase is a continued play on my favorite sector, housing. WFC is one of the largest mortgage lenders in the United States. Though the timing cannot be reliably predicted, housing will turn around at some point. When this happens, WFC’s earnings should rise and I expect a subsequent rise in share price.
Sources:
WFC Annual Report. https://www.wellsfargo.com/downloads/pdf/invest_relations/wf2010annnualreport.pdf
