If You Believe in the U.S. Economy Recovery, Look at Wells Fargo

Wells Fargo (WFC) has a unique management and business model in banking, built on ruthless efficiency, tireless salesmanship and avoidance of undue risk, and that approach brought its return on assets, pre-financial collapse, well above 1.5%.

WFC Stock Chart by YCharts

As you can see, Wells consistently outperformed its competition on this crucial measurement of banking success. ROA matters – and more than ever – because it measures how profitably a bank manages its balance sheet. And with tougher capital rules phasing in, attaining a high ROA will only get tougher.

WFC Stock Chart by YCharts

Wells' Net income was $12.4 billion last year, or $2.21 a diluted share, even as its ROA was a middling 1.01%. Push that ROA up to 1.5%, and without any assets growth you’ve got a 50% increase in profit. As bad loans are charged off, Wells will again boost its ROA. First quarter ROA was 1.23%.

It’s a race car that hasn’t gotten out of third gear yet.

WFC Stock Chart by YCharts

That’s right. The p/e is currently below 12, and Wells has an earnings yield – a statistic used to compare equities to bond yields – of more than 8%. All that gnashing of teeth over mortgage put-backs (Wells is less exposed than its competition) has knocked bank stocks around in recent months. And with a nearly-15% dip for Wells during the last 90 days, it’s rated attractive by YCharts Pro and seen as undervalued.

WFC Stock Chart by YCharts

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Wells still has plenty of bad loans to charge off. And its merger with Wachovia, which more than doubled the size of the company, is not yet completely integrated. But over the next two-to-three years, by cleaning up its loan portfolio and bringing the Wachovia operations up to Wells’ standard of efficiency and cross-selling, Wells could easily be back above a 1.5% ROA. See YCharts earlier column on Wells for an explanation of its unique business approach.

The recent stock dip is a buying opportunity. There’s a reason Warren Buffett’s Berkshire Hathaway (BRK.A) owns 6.8% of Wells, or about 359 million shares as of December 31, 2010 – it’s the kind of disciplined, well-run company that over time thrives against sloppier competitors. Sounds like a value stock.

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