I'm searching for good investments to make in 2013. In this article, we'll take a look at Wells Fargo & Company (WFC). We'll evaluate Wells Fargo as an equity investment: We'll examine the historical share price performance, financial performance and valuation.
We'll start by describing the risk-return profile of the security. Next we'll do a risk-return comparison with the S&P 500. Then we'll move into more tradition financial analysis: we'll cover the financial performance, valuation, and macroeconomic factors impacting the enterprise's valuation.
Also, we'll evaluate the Firm from the perspective of a technical analyst.
I think investors should accumulate shares of Wells Fargo, but you read and decide.
We'll use descriptive statistics by taking a sample of the population of nominal monthly returns of the Company. At this point, we won't make any statistical inferences. Some of the sample statistics will include the arithmetic time-series mean, and the time-series median. Also, we'll take a look at a histogram of nominal monthly returns. We'll also discuss the absolute frequencies, relative frequencies and cumulative relative frequencies of the return profile. Further, we'll determine the geometric mean return and the modal interval. The sample will consist of monthly returns between January 2000 and January 2013.
Readers should note that the selected sample contains two bull markets and two bear markets. Further, the sample contains both high interest rate and low interest rate environments.
The time-series arithmetic mean monthly nominal return was 1 percent. The time-series median monthly nominal return was 0.8 percent.
One of the nominal monthly returns was between -40 percent and -35 percent. Eight of the nominal monthly returns were between -15 percent and -10 percent. Nine of the nominal monthly returns were between -10 percent and -5 percent. Thirty-eight of the nominal monthly returns were between -5 percent and 0 percent. Sixty-one of the nominal monthly returns were between 0 percent and 5 percent. Twenty-five of the nominal monthly returns were between 5 percent and 10 percent. Twelve of the nominal monthly returns were 10 percent or greater.
About 25 percent of the nominal monthly returns were between -5 percent and 0 percent. Further, 39 percent of the nominal monthly returns were between 0 percent and 5 percent. A little over five percent of the nominal monthly returns were between -15 percent and -10 percent. Finally, 16 percent of the nominal monthly returns were between 5 percent and 10 percent.
That said, 37 percent of the nominal monthly returns were between -40 percent and 0 percent. That means the other 63 percent of the nominal monthly returns were 0 percent or higher. The modal interval was 0 percent to 5 percent.
The time-series geometric mean nominal monthly return or time-series nominal monthly compound growth rate was 0.6 percent. The nominal geometric mean monthly return on a bond equivalent basis was 7.2 percent. The nominal geometric mean monthly return on an effective annual yield basis was 7.4 percent.
We'll make a statistical inference about the population geometric mean nominal monthly return. The population geometric mean nominal monthly return at 95 percent confidence, assuming a standard normal distribution, was between 1.97 percent and -0.77 percent.
Wells Fargo's nominal monthly return distribution was positively skewed and leptokurtic.
Next, we'll compare some of those sample statistics with the sample statistics of the S&P 500 between 2000 and 2012.
The arithmetic time-series mean monthly nominal return on the S&P 500 was 0.1 percent. The time-series median monthly nominal return on the S&P 500 was 1 percent.
The geometric time-series mean nominal monthly return or time-series nominal monthly compound growth rate on the S&P 500 was 0 percent. I'm sure you can calculate the nominal bond equivalent yield and nominal effective annual yield on the S&P: It was 0 percent.
Thus, Wells Fargo outperformed the S&P 500 between 2000 and 2012.
The sample standard deviation of nominal monthly returns on Wells Fargo was 8.8 percent. The sample standard deviation of monthly returns on the S&P 500 was 5 percent.
Wells Fargo's total revenue grew at a nominal annual compound growth rate of 13 percent between 2003 and 2012.
The Firm's net income grew at a nominal annual compound growth rate of 13 percent between 2003 and 2012.
The profit margin is generally stable between roughly 20 percent and 24 percent.
The dividend increased at a nominal annual compound growth rate of 1.8 percent between 2003 and 2012. Over the next three years the dividend should increase substantially to at least $1.30-share.
Since at least 2003, the firm has grown faster than the economy. Also, sales and net income appreciated at a faster pace than the share price.
Professional investors should monitor the firm's financial performance and financial position as the Firm could continue to outperform the broader market.
The Firm was valued at 3.78 times sales and 10.35 times trailing earnings.
The dividend yield was 2.53 percent and the debt to equity ratio was 1.17.
Wells Fargo had a market capitalization of roughly $183B.
From a macroeconomic perspective, U.S. fiscal policy is weighing on aggregate demand while U.S. monetary policy is boosting aggregate demand as the U.S. economy operates below potential GDP.
Revenue from community banking continues to trend higher while wholesale banking revenue trends higher. Also, revenue from wealth, brokerage and retirement continues to trend higher.
Shares of Wells Fargo are trading above the rising 50-day simple moving average: The intermediate-term trend is towards higher prices.
The 14-day slow stochastic indicator is in overbought territory and the 12-day rate of change indicator is forming a negative divergence with the share price while remaining above equilibrium.
Also, the broader market remains in a Dow theory bull market.
Finally, the Dow Jones industrial average and S&P 500 are trading above the 50-day simple moving average.
Disclaimer: This article is not meant to establish or continue an investment advisory relationship. Before investing, readers should consult their financial advisor. Christopher Grosvenor does not know your financial situation and ability to bear risk and thus his opinions may not be suitable for all investors.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.