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Weekly Wrap: Volatility Returns; Wells Fargo Stumbles

Fri, 16 Sep 2016

Wells Fargo gets dinged, but we still see value in the firm. Plus, central banks send markets gyrating, and Bayer snags Monsanto.


Video Transcript

Jeremy Glaser: Wells Fargo crosses the line; Bayer finally snags Monsanto; and volatility returns. This time on the Morningstar Weekly Wrap.

Wells Fargo will pay $185 million penalty and fire 5,000 employees over its aggressive and sometimes fraudulent practices in selling customers multiple products. Morningstar's Jim Sinegal sees the behavior as beyond the pale, but that investors need to put the size in perspective.

Jim Sinegal: Developments and fines at Wells were clearly a disappointment for a company with a long history of excellent stewardship. However, we think a few factors actually make this a buying opportunity. First, there is no evidence that senior management knew about or encouraged these practices. In fact, opening accounts without people's knowledge didn't make money for Wells; it helped the sales people that were doing it, but the company didn't benefit at all and will actually be hurt by it. Second, we think this is an isolated incident. Management has said that 2/3 of the accounts were in the Southwest, that's the only region where Wells customer service ratings fall below its competition. Everywhere else in the country, Wells customers think it does a better job than its peers. So we agree with management that these are isolated problems. And third, it's not an indication that Wells is an outlier in terms of customer complaints. We looked into data with the Consumer Financial Protection Bureau, and for its size, Wells actually receives less consumer complaints than a lot of its peers.

Glaser: After months of negotiation, Monsanto's board finally acquiesced to an acquisition offer from Bayer. Jeff Stafford thinks Bayer is getting a reasonable price and that regulators are likely to give the deal the green light.

Jeff Stafford: On Sept. 14, Bayer agreed to buy Monsanto for $128 per share. We were expecting at least $130 to get this deal done, so we're a bit surprised, but $128 is in the range of what we expected. The market is skeptical that this deal will close, with Monsanto shares trading at more than a 15% discount to Bayer's final offer price. We're less skeptical as we don't see antitrust hurdles as a major obstacle. We think this because of the lack of broad product overlap between Monsanto and Bayer. Monsanto is mainly a seeds company, and Bayer is mainly a crop chemicals company. Because we expect the deal is likely to close, we are moving our Monsanto fair value from its standalone fair value of $120 per share to $126 per share. Our Bayer fair value remains unchanged at 126 euros per share as we think Bayer is paying a fair price for Monsanto when synergies are considered. We think both of these companies are undervalued.

Glaser: After a post-Brexit lull in volatility, the stock market has been become choppier again as central banks are back in focus. There has been both some concern that the ECB is running out of stimulus options, while the Fed seems more likely than not to raise rates this year--even if they do stay put at their meeting next week. These concerns are not likely to melt away anytime soon, so investors should potentially be prepared for more choppiness ahead.

And for investors worried about rising rates, Christine Benz wrote an article this week on asset classes beyond the usual suspects that are exposed to higher rates.

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