Wednesday, March 01, 2006

Wells Fargo on the Move

As promised, I want to show you some charts of stocks that are breaking to new highs. The first is Wells Fargo, one of the largest and strongest banks in the United States. We have owned the stock in our Rising Dividend portfolio for many years, having received it when it bought one of our largest holdings Norwest Financial. We kept the stock because the top management of Norwest was tapped to run WFC. Richard Kovacevich was way ahead of his time is seeing the merits of cross selling. He institued initiatives to triple the number of products that each WFC customer used (checking, loans, credit cards, mortgage, etc.) WFC is big in mortgages, consumer loans, business loans, and wealth management. WFC and other banks have been facing a number of headwinds: narrowing profit margins because of the rise in short-term interest rates; slowing in mortgage business resulting from a slow down in the real estate market; and worries about debt loads of consumers. In the face of all these issues, and moving against the grain of many other weak-performing banks, WFC recently broke out of a trading range and hit a new high. I have shown WFC here on one of our Dividend Valuation Charts. Price is in dark green, and valuation is in gold. The model covers 21 years of the multiple correlations of WFC's price, dividends and bond yields. The R2 of the formula to the actual price is .93. Wells Fargo -- 20 Year Price - Valuation This move against the grain by WFC is a very good sign that high quality stocks are shaking off their lethargy. But WFC's move begs the question: why are they doing so well, when many banks have not done much pricewise in years? Furthermore, when a stock breaks to a new high in the face of headwinds, it usually means a change is near. What might that change be? I think WFC's move is a signal that very high quality companies are on the march. I will show more examples later. It also makes the case that some very smart people are betting that the worries about the housing bubble may be overblown, because WFC is one of the country's largest mortgage originators. Finally, WFC's counterintuitive move may be based on the counterintuitive idea that slower overall economic growth would be good for the markets. That would mean that the 14 rate hikes by the Fed are finally starting to bite. Whatever the reason, a company like WFC does not break to a new high because it gets touted on CNBC. It does so based on the valuation work by very large investors. Our model says WFC's most probable selling price by the end of 2006 will be at least $73.