Wells Fargo, One of the Survivors Regardless of Others (WFC)

On Friday, after a potential deal may be struck to save the monolines, we had been pondering the overall recovery of the healthy banks in the sector.  We have covered "the banks that will make it" before, and Wells Fargo (NYSE: WFC) is one that we think will get to be a selective acquirer after the recent malaise.

Then this weekend we saw that Wells Fargo is actually the cover story on Barron’s, and we have noted how Warren Buffett added to his holdings on last look.

We look at Wells Fargo as one of the winners in a crowd of would-be losers.  Its operations were far less leveraged with CDO’s and funny money mortgage operations that have been seen at some many financial houses.  Its management also hasn’t bought into much of the recently crafted three and four letter initial products that are difficult to understand and explain.  While the company has had to add to its loss reserves, it is still one of the healthier names in the sector.  It also has a very competitive yield of 4.2% that would make it seem like a Dog of the Dow member, even though it isn’t a DJIA component.

We actually think that in a financial recovery that will eventually come, analysts will raise their targets AND their ratings on Wells Fargo.  Almost every firm has moved to a cautious rating because of the current issues, and whenever the tide turns the analysts will ultimately turn to the strong names in the group.  The truth is that the banks and financial institutions with the junkier and poorer books that are more speculative will win in the first round of a recovery because of the inherent leverage they have.  But at the end of the day investors will want to have the quality names on their books.

The chart is perhaps soon to be an obstacle in a sector that is still likely going to see more and more bad headlines over the next 30 to 180 days.  The stock is up close to 10% from the first few days of the year and up well over 20% from the January-scare lows.  But its 200-day moving average $32.91 (roughly 5% higher than the $31.44 Friday close) and even if that number keeps drifting slightly lower it may act as a hurdle.

If the bank decides to be an opportunistic acquirer, then of course you could expect some of the normal immediate dilution share pressure.  And that is when you want to give this one your attention.  It’s one of the winners.

Jon C. Ogg
February 23, 2008