Circling Back to Our Wells Fargo Buy Call
If you were coldly rational enough to buy Wells Fargo when everyone else wanted to sell it, the question now is what to do with your position.
Stock Strategist
We were in good company when we pounded the table on Wells Fargo (WFC) at $10 per share back in late February. This past weekend, at the annual Berkshire Hathaway (BRK.B) festivities, Warren Buffett mentioned that he told a group of students at the time that if he had to put his entire net worth in one stock, that stock would be Wells Fargo at the $9-$10 prices, where it bottomed.
Wells Fargo has done fairly well since then with an approximate 160% return. The nationalization hysteria has receded, and it appears investors are finally focused on the very thing we were focused on back in February: the long-run earnings power of Wells Fargo's banking franchise. If you were coldly rational enough to buy Wells Fargo when everyone else wanted to sell it, the question now is what to do with your position.
I can answer that question in two ways, but there is no correct answer. It depends on your individual situation as an investor. If you're like Buffett and your favorite holding period is forever, then you can do much worse than holding Wells Fargo. We think the stock is fairly valued at current prices, but Wells Fargo is a business whose value should steadily increase over time. Between owning the broad market through, say, the S&P 500 ETF (SPY) and Wells Fargo, I'd still pick Wells Fargo.
Personally, however, I have sold my Wells Fargo common stock, but I still own a significant amount of the company's debt and preferred stock. My view of the investing world is that for many years to come, the investments worth holding are the ones that pay out a stream of income. My Wells Fargo securities were purchased at 20%-plus yields, so I am content to collect my interest payments each quarter. If you're interested in income-generating ideas, my colleague Josh Peters has many of them in his DividendInvestor newsletter.
If you are feeling more adventurous, I would suggest selling options volatility on the large banks, Wells Fargo included. The expected volatility implied in options prices for the large banks is still very elevated, and I suppose with good reason. As the roller-coaster ride of the last few months has illustrated, the realized volatility of financial stocks has been extremely high. However, I think volatility, and thus option premiums, for bank stocks will collapse in the months ahead.
Mr. Market has been through all the stages of grief with bank stocks over the past 18 months, and I think he is finally ready for acceptance. After lurching from one position to another, the U.S. government has settled on a framework that will not allow any systemically important financial institution to go the way of Lehman Brothers. The big banks will settle into a boring, zombie existence feeding on fat net interest margins courtesy of the Federal Reserve until the smoldering craters on their balance sheets are filled. Loss provisions will be taken, loan losses will come, and loan losses will be charged off. Rinse and repeat, quarter after quarter, and I wouldn't hold your breath--this will take some time.
Barring a freak event like China dumping its Treasury holdings, I suspect the financial sector is about to get exceptionally boring after almost nonstop excitement. Boring, though, is not what the options market is pricing in for bank stocks. Options typically involve more advanced trading strategies, beyond what I can discuss here, but my colleague Philip Guziec covers both options strategies and provides ideas in his OptionsInvestor newsletter.