Chasing Value: Wells Fargo Beats the Street Offering Positive View

In May 2009 I posted Chasing Value: Wells Fargo - squeezing out the shorts! describing a scenario by which Wells would be somewhere between $61 and $64 in three years time. Nothing has happened to make me feel any different. At the time of the story WFC was $24.25.

As I write this morning it is trading around $27.00. If you own it I see no reason to sell it. Besides the improvements in the business and the continued cost cutting there should be future increases in the bottom line as the loan portfolio mix changes from bad to good, allowing for a reduction in the required loan reserves and contributing billions of dollars to earnings.

Examining the current metrics, we find an average P/E or 15.42 and a forward looking P/E of 12. More importantly the price to cash-flow is only one-third the market average at 3.33, and the same is true for the price to sales of 1.24 and price to book 1.52. These figures combined with the upbeat outlook make the stock look very attractive. As Wells Fargo gets stronger, there are still many other banks that are getting weaker or closing. This, too, will help the company going forward.

Beside buying the stock, I would look at selling naked puts, which I have been doing more and more often in these circumstances. By selling the January 2011, $27.50 put to open you would receive $4.05 per share today. This makes your break even $23.45 if it is put to you, a substantial discount to the current price. If it is not put to you the annualized gain is 34.36% (4.05 / 23.45 x 2) which is a very tidy profit.


Sheldon Liber is the CEO of a small private investment company and the principal for design and research at an architecture and planning firm. He writes the columns Chasing Value and Serious Money. Disclosure: He own shares and options of WFC..