Why A 5-Year Wells Fargo Skeptic Is Now A Buyer

Summary

• I wrote four articles between 2016-2018 citing critical reasons to avoid Wells Fargo.
• The critical reasons for avoiding WFC in favor of other bank stocks were not adequately addressed by management until the 4th quarter earnings call.
• On January 15 the CEO provided for the first time concrete evidence that the problems long plaguing WFC are on a path to resolution.
• The bank's current Price to Tangible Book should improve by at least 60% over the next 3-5 years fueled by 10%+ ROE and a double-digit decline in share count.
• WFC had been added to my long-term buy-and-hold bank portfolio (12 banks); selling Puts and buying shares over time with target acquisition price of $29-30.

Reasons for Not Owning WFC Until Now

My reasons for avoiding Wells Fargo and Co. (NYSE:WFC) are well documented. Between 2016 and 2018, I wrote four articles concerning WFC's problems. Here are links to those articles:

1. 9/29/2016: "Looking For Buy Signal On Wells Fargo? Watch Insiders."
2. 10/4/2016: "Looking For Buffett's Plans For Wells Fargo: Here Are The Facts."
3. 11/30/2017: "Wells Fargo: Here's Why It's Time to Play Defense."
4. 3/27/2018: "Wells Fargo: Despite 3% Dividend, Avoid Until This Happens."

The material banking issues cited in the articles:

1. By far the most important: Pervasive and material failures in internal controls. The 2017 article provides a comprehensive list of these failures.
2. Profound concern that the bank's board of directors lacked the skill and experience to govern WFC.
3. Aggressive intervention by WFC's two primary regulators: Federal Reserve and the Office of the Comptroller of the Currency.
4. Skepticism of the bank's ability to cut operating expenses in the face of pervasive internal control and risk management failures.
5. Skepticism of the bank's ability to buy back shares while under intense regulatory scrutiny,
6. Absence of insider buying even as share prices fell from high $50s to low $20s.
7. Concern Warren Buffett would sell WFC shares after holding 10% ownership, thus flooding market with shares.

My preference to own JPMorgan Chase (JPM) for the past 5+ years as my primary megabank holding has been rewarded on a relative basis to WFC. Chart 1 shows price change since the date of the first WFC article and chart 2 shows price change since the fourth article was published. Five years from now I expect WFC to show the greatest price gain of the five megabanks.

Chart 1

Chart 2

What's Different Now?

WFC has been on my radar since early last year when shares fell to under $30. My hesitation

Analyst’s Disclosure: I am/we are long JPM, WFC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

As a 31-year employee of Bank of America, I continue to have certain financial interests in BAC, though own no common shares.