Wells Fargo: The Come Back Kid II
Publishing a follow-up on my original Wells Fargo pitch from way back
I had a lot of fun writing this post since it was a blast from the past.
Back when I first started the Hidden Rock Capital blog, one of the first stocks I wrote up (besides the energy stocks) was Wells Fargo (WFC), titled “Wells Fargo: The Come Back Kid”.
The Comeback Kid…not to be confused with The Karate Kid!
Below is a snapshot of my article from May 2021.
In that article I argued that Wells Fargo was a compelling long opportunity because of 3 main reasons
Expansion of net interest margin
Lifting of Fed asset cap
Opportunity for major cost reductions
Fast forwarding more than 3 years after this article was published, and 2 of these 3 bullish drivers has been actualized, with the 3rd (lifting of Fed asset cap) looking likely over the next 12-24 months. As a result, WFC’s stock price is up roughly 40-50% from May 2021 when the article was written.
Source: Yahoo Finance
So what’s next for Wells Fargo?
With the majority of my initial bullish thesis realized, I have sold down most of my position in Wells Fargo. As a reminder, in my original article I mentioned that I purchased long-dated call options on Wells Fargo given the low implied volatility, which helped turbo-charge my returns without paying too much upfront option premium.
Wells Fargo stock doesn’t seem compelling enough for me to re-enter the trade, and if I had to pick a bank stock to purchase right now, I would likely go with Citi Bank (NYSE: C) instead, given that it is earlier in the turnaround cycle with more business improvements to come.
Citi still trades well under its tangible book value of $88 as of end of Q2 2024, implying a valuation of less than 0.8x tangible book value (compared to over 2x tangible book value for more richly valued peers such as JP Morgan Chase). Full disclosure - I own some shares of Citi in my personal account and they have done well over the past 12 months.
Banks in general are difficult for me to take large positions given their opaque financials, and vulnerability to economic tail risks (see Great Financial Crisis of 2008, or the more recent 2023 regional bank crisis). So I likely won’t be adding Citi or other banks as high conviction ideas for the model portfolio currently. At the same time, it’s always good to keep an eye out across multiple sectors for potential opportunities to emerge down the road.