Invest In Housing: Buy Outperforming Wells Fargo

| About: Wells Fargo (WFC)

Many large banks have recently been thrust into the spotlight for gaffes such as Libor manipulation by Barclays (BCS), $5.8 billion in losses for J.P. Morgan (JPM), or Moody's downgrades. One such institution that has avoided such mistakes and negative attention is Wells Fargo & Company (WFC). Wells Fargo, the fourth largest bank in the United States, has been an excellent and stable performer over the past few years. The diversified financial offers investment, banking, mortgage, and insurance services. Outperforming the market and financial sector, Wells Fargo has rewarded its shareholders with consistent earnings growth and is positioned to substantially boost earnings along with revenue even higher whilst taking advantage of the housing recovery.

Wells Fargo is the number one home mortgage lender in the United States, making it an outright beneficiary of the housing comeback. After the housing bubble collapsed in 2008, the market has been waiting for Real Estate markets to bottom and begin their resurgence. It has not been until recently that this process has begun. The monthly index from the National Association of Home Builders rose to 35 in July, standing at its highest levels since 2007. This is just one indicator signaling the high confidence in housing at the moment. According to a report by Yahoo! Finance, home sales have risen for twelve months in a row with prices simultaneously increasing for five straight months. Furthermore, the amount of available homes for sale fell 5% from May and 27.4% from June 2011. Areas that housing is rapidly progressing in are actually seeing a transition into a seller's market. Just to emphasize the strength of the housing rebound, it should also be noted that the Median Sales Price of sold homes rose 2.5% from May to $170,067.

The numbers tell the story; housing is now one of the brightest aspects of the economy, and is even helping to carry the market. This all bodes well for Wells Fargo. Continued low rates are providing an incentive for Americans not only to get loans for new homes, but also to re-finance currently owned homes. Meager revenue growth has been one of the few weaknesses in terms of Wells' performance in prior years, but the magnitude with which housing has come back will allow for the bank to look to home mortgages to drive revenue higher. Just last July, the company attributed its on-par revenue to a lack of new mortgages as a result of the struggling housing market. Market conditions have undergone a serious alteration in the past year, and housing will no longer be an underperforming division for the bank. Home mortgage lending is one of Wells Fargo's largest revenue generators and the bank has become the most prominent mortgage lender in the nation, inevitably positioning the company perfectly to capitalize off of the housing recovery.

As aforementioned, Wells Fargo has not had the astounding revenue growth that investors would have liked, but its earnings have done well to make up for it. Since 2010, Wells Fargo has seen steady but promising earnings growth.

Wells Fargo EarningsClick to enlarge

The chart, courtesy of The Motley Fool, pays tribute to the consistent earnings per share growth of Wells Fargo despite average revenue performance. This leaves much room for potential. Earnings and profit growth come partially out of the cost reduction effort outlined last July. Expenses were to be cut to $11 billion per quarter by the end of 2011 from the $12.48 billion per quarter reported at the time. Cost reduction was essentially implemented to combat weak economic conditions largely caused by housing. With housing no longer strangulating revenue, the combination of cost reduction and revenue growth will lead to an even greater progression in terms of future earnings.

Wells Fargo has the balance sheet to go along with solid earnings numbers and prospective revenue growth. It has $1.3 trillion in assets as opposed to $1.17 trillion in liabilities, a fairly even ratio contributing to the bank's stability. This stability is expressed in the Moody's rating of Aa3 for Wells Fargo Bank, NA and A2 for Wells Fargo & Co.. Just as importantly, Wells Fargo's long-term debt has shrunk from $267 billion in 2008 to $125 billion in 2011. Concurrently, it has depleted its debt to assets from 15.62% in June 2011 to 13.55% in June 2012. Wells Fargo has established a maintainable ratio of assets to liabilities and has made its balance sheet even more lucrative by slashing its debt.

Wells Fargo & Co. has increased 23% year to date, significantly higher than the 14.44% sector (XLF) and 8.92% S&P 500 gains for the year. Wells Fargo stock has outperformed and has become expensive due to its performance and outlook. As an added incentive to invest, Wells Fargo raised its total dividend declared for the first quarter to $0.22 from $0.12 and has boosted its share repurchase plan, as stated by S&P. Let the other banks take the excessive risk and take the fall for their mistakes. Wells Fargo has the earnings, stability, and prominence in the recovery-leading housing sector to drive the stock higher.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in WFC over the next 72 hours.