By Matt Doiron
Warren Buffett's Berkshire Hathaway (BRK.A) reported ownership of 394 million shares of Wells Fargo & Company (WFC) at the end of March, up from 343 million shares in March 2011. According to Berkshire Hathaway's 13F, Wells Fargo & Company was the second largest stock holding in the portfolio. Buffett likes value stocks with a good brand name; Wells Fargo seems to have a better reputation than many other large banks such as Bank of America (BAC) following the American financial crisis and continuing criticism of banking practices.
A number of funds agree with Buffett that Wells Fargo is a good buy. In fact, Wells Fargo & Company made our list of the ten most popular stocks among hedge funds for the first quarter of 2012. Lansdowne Partners had an 18.1 million share position in the bank at the end of the first quarter; while it had reduced its stake since the beginning of the year, its 13F still reported Wells Fargo as its third largest position (see the rest of Lansdowne Partners' portfolio). Billionaire Ken Fisher's Fisher Asset Management increased its holdings to 11 million shares.
Wells Fargo has risen 17% year to date, and 32% since a year ago, after narrowly beating earnings for three quarters in a row. In the second quarter of 2012, the bank reported record quarterly earnings of $4.6 billion, a 17% increase compared to the second quarter of 2011. Revenue was also up compared to the same period a year ago. Tier I common equity ratio increased above 10%, putting Wells Fargo in what it described as a "strong" capital position.
But is Wells still a buy? Judging by its valuation multiples, possibly. Its trailing P/E is 11, which rates it some consideration as a value stock even after its increase in price; its forward multiple, based on analyst estimates for earnings in 2013, is only 8. The stock pays a 2.6% dividend yield, so investors are getting a moderate amount of cash on a regular basis in addition to a low-priced expected earnings stream. Looking only at the stock compared to the overall market, it appears to be a good value with regards to earnings. Investors should, however, note that the market price is above the book value of Wells Fargo's equity.
When Wells Fargo is compared to other banks it doesn't look like as good a value. Citigroup (C) and Bank of America both have market capitalizations of about $80 billion and P/B ratios of 0.4; Wells Fargo has a market cap of $181 billion and a P/B ratio of 1.3. This means that the book value of Wells Fargo's equity is actually less than for these competitors; in fact, its market cap is less than the book value of these two competitors. Both of these banks also trade at trailing P/E multiples of 8, lower than Wells Fargo. Wells Fargo does have an advantage in that its dividend yield is substantially higher, with these other two banks yielding under 1%, but on a value basis we would expect the spread between these banks to narrow over time. Another peer of Wells Fargo is JP Morgan Chase (JPM), which trumps Wells Fargo on the dividend yield front: its yield is 3.3%. JP Morgan trades at 0.7 times the book value of its equity- again, its book value is larger than Wells Fargo's but its market cap is smaller- and eight times its trailing earnings. In addition, CEO Jamie Dimon made a large purchase of JP Morgan stock last month, which is generally a bullish signal. We would suggest that prospective buyers of Wells Fargo consider other large banks instead.
Disclosure: I am long C.