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Wells Fargo Reports Friday, July 12th

I've recently written about earnings to be on the lookout for this coming week. On my list, Wells Fargo (NYSE:WFC) is the company that definitely seems to have the most bullish sentiment behind it. So I took a closer look and found that there is a case for going long Wells Fargo leading up to earnings this coming Friday.


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Wells Fargo has been performing splendidly over the past six months, up over 20% since February of 2013. Leading into earnings, there's an overwhelmingly bullish sentiment about Wells Fargo from both analysts and bloggers covering the stock (just read the last 10 Seeking Alpha articles on the company).

Wells Fargo continues to be the top mortgage originator through Q1 2013, putting itself in a position to continue to "strike while the iron's hot" should housing continue its recovery. In addition, Berkshire Hathaway (NYSE:BRK.A), (NYSE:BRK.B) added another 18 million shares of Wells Fargo in Q1, increasing its stake in the company to a massive 20%. Wells Fargo has also beefed up its dividends, offering $0.30/share.

This Friday, analysts are going to be expecting $0.92/share.

Here's some color on the three main reasons that I'm bullish on Wells Fargo before earnings:

1. The Housing Recovery Is Real

One of the major risks associated with Wells Fargo is that this housing recovery turns out to be an illusion. Although it sounds a little unlikely, it could be the Achilles heel for the company and is a risk that needs to be taken seriously.

However, all signs are pointing to this recovery being the real deal -- and I can confidently say that, as it comes directly from the source -- the builders.

CNN Money reported last month:

The National Association of Home Builders' index hit 52 in June, marking the first time it has been above 50 in seven years. A reading above 50 indicates that more builders say sales conditions are good rather than poor. The index has been posting gains for the last year, but those moves only indicated that builders thought the market was less bad than it had been.

"It's further confirmation of what we've felt for six months at least -- that the housing market is back and will continue to improve," said David Crowe, chief economist for the trade group.

June is typically a month when builders report slower activity, after the spring buying season peaks. But this year they're reporting better traffic levels and better sales conditions than they did in May.

The NAHB survey found that 41% of builders said current conditions are positive, almost double the percentage who said they were poor. A year ago, only 15% said conditions are good, while three times as many said it was a poor environment.

Since the housing recovery is likely to continue, Wells Fargo is positioned perfectly to reap the rewards of confidence in housing.

2. Buffett Is In

It was reported in May that Berkshire Hathaway purchased 18 million shares of Wells Fargo in the first quarter of the year. Buffett now has a stake of 458 million shares and Wells Fargo is often touted as Buffett's favorite bank.

Forbes reported on Buffett's growing stake in the company towards the end of 2012:

If you're looking for what the Oracle himself is interested in, turn your attention to Wells Fargo. (WFC). In the third quarter, Buffett -- yes, this is very much his stock -- picked up another 11.5 million shares of Wells Fargo boosting Berkshire's stake in the bank to more than 420 million shares. The current market value of those 11 million new Wells Fargo shares is more than the entire Deere stake.

And the interest in Wells Fargo is a continuation of a four-year trend. Since the end of 2008, Berkshire Hathaway has increased its Wells Fargo stake from 290 million shares to 422.5 million shares, and the bank stock's share of the overall Berkshire portfolio has grown from 16.5% to 19.4%. Yep, nearly $1 in every $5 dollars of Berkshire's investment portfolio is riding on Wells Fargo.

With annualized returns of 20% for almost five decades, the smart money follows Buffett here.

3. Dividends Increasing

Courtesy of Nasdaq.com, we can see that Wells Fargo's dividends are heading in the right direction:

Ex DateCash AmountDeclaration Date
5-8-13$0.304-23-13
1-30-13$0.251-22-13
11-7-12$0.2210-23-12

Do you really need a reason to like dividends? OK -- here's nineteen of them. What a comforting piece of reassurance from a company a dividend is.

A dividend is the hand that rocks the cradle, assuring you that although your investment could potentially be off in the short-term, the company still wishes to afford you the courtesy of a guaranteed return on your investment.

Dividends are one of the best types of hedges/insurance when taking a long position, and the fact that Wells Fargo continues to raise its dividend regularly makes it an attractive equity to purchase.

Conclusion

A great strategy here if you're currently holding WFC or plan to purchase it pre-earnings this week would be to write some calls against it that are above your cost basis -- offering you a hedge should the stock go down, and a win/win style arrangement if the stock goes up and you're exercised. For these three reasons, I'll consider taking a position in Wells Fargo this week before earnings.

Source: 3 Reasons I'm Bullish On Wells Fargo's Earnings