Wells Fargo: The Highest Ranked Stock In Our New Fundamental Index

| About: Wells Fargo (WFC)

We have spent the last three months developing a new model to add to our pure dividend models. We are doing so because in an upward trending market like the current one, the performance of stocks is much more influenced by earnings growth and analysts' earnings estimates and revisions, than by dividend declarations. This is not to say that dividend growth is any less important, or that we are any less committed to dividend investing. It is only to underline that a bull market requires a slightly different valuation dashboard, than does a directionless or a bear market.

In normal times, we regard dividends as the driving factor, and earnings as the corroborating factor, in the valuation of a stock. We believe investing purely on earnings growth is flawed because earnings growth is volatile for most companies. By contrast, dividend growth is much less volatile and a better indicator of the true fundamental direction and value of a company. To our way of thinking, the dividend is the boat and earnings are the outrigger.

In a bull market, these roles reverse. History shows us that when "animal spirits" return to a market and stocks begin to rise, stocks tend to be driven much more by these animal spirits, than by purely quantitative valuation models.

To show us which stocks may be ripe for a rise in animal spirits and, consequently, in price, we have developed a ranking model that provides us with a short list of companies to study in more detail. The model is dividend-centric in that a company must pay a dividend to be considered, but from there on, earnings growth and analysts' projections play a more important role than in our existing models.

We filter all the dividend-paying stocks in the Russell 1000 database for their ranking against each other in seven areas.

  1. Last 12 months total return
  2. Last 3 months total return
  3. Last 12 month dividend growth
  4. Last 12 month earnings growth
  5. Analysts projected 3-5 earnings growth
  6. Last 3 months analysts earnings revisions
  7. Trailing 12 month price to earnings ratio

The total cumulative ranking points that each company receives is then averaged to provide an individual company ranking score. A score of 100 is perfect.

As indicated in the title of this article, the company with the highest cumulative score in the Russell 1000 is Wells Fargo (WFC) with 82 ranking points. Cummins Engines (CMI) comes in second with 81 points. (It is good for us that we already own both companies.)

Wells Fargo, aside from its strategic power and financial strength, produces powerful scores in our model:

  1. It has outperformed 77% of all stocks over the last 12 months.
  2. It has outperformed 92% of all stocks over the last 3 months.
  3. WFC's 12 month earnings growth has beaten 66% of all companies.
  4. Its 12 month dividend growth exceeds 96% of all companies.
  5. Analysts' 3-5 year earnings growth beats 99% of all companies.
  6. Analysts' 3 month earnings revisions beats 68% of all companies.
  7. WFC's PE is lower than 81% of all Russell 1000 companies.

WFC's strong showing in our models may surprise many who have doubts about the banking sector. In our judgment, it is this overhang of doubts that is keeping WFC cheap in the face of big growth estimates. To be sure there are problems with banks, but we believe that WFC has weathered the storm better than any other bank in the U.S.. We have been adding WFC to our accounts.

Disclosure: I am long WFC, CMI.