Wells Fargo Is Still Very Cheap

Wells Fargo's (WFC) news of better than expected earnings and a 10% dividend hike sent the stock up nearly 33%. It also powered the overall stock market up nearly 2.5%. This is a perfect illustration of what we have been saying about the banks. Prior to today almost all banks were being treated like they would dry up and blow away, and that is simply not the truth. Banking is the oil that allows local and international trade to occur. No banking and we are back to Mayberry, Green Acres, or Ozzie and Harriett. Those were the good old days, but those days are gone. Banks are going to make it out of this crisis, and it will be the strong banks like WFC that will lead it. I am hearing that in many cities where there are wounded banks like National City, Fifth Third, Key, and First Horizon, that smaller local banks and stronger national banks are taking customer at will. This is completely anecdotal, but I'm hearing it from my sources all over the country. JP Morgan is hiring top talent in California. Most other regional banks there are firing. It is a simple case of the strong getting stronger and the weak getting weaker. Banks that avoided the subprime debacle and have solid capital and loan loss ratios are flat out ruling the roost, and my experience tells me that the gains they are making against the wounded banks will not be won back easily by the wounded crowd. There are hundreds of banks that will report earnings over the next 10 days. The markets will bob and weave with each important release, but the Wells Fargo news shows what a solid bank with a reputation for terrific risk management and a culture of expanding their usefulness to an ever increasing clientele with an ever widening list of products can do. Not all banks are Wells Fargo, but then neither are all banks National City, either. There will be some surprisingly good numbers coming from the banks, and as I have been saying most banks have written off an enormous amount of pain. Is it possible that we are nearing an end of the write offs? If we are, we are near a rally in banks that will make today's pop look like a sparkler. Our models say that WFC is still undervalued by 20%-30%. With the short that has built up in the bank stocks, the winners, like WFC, can go higher than you can imagine, as the shorts are forced to cover. The next key release is for Bank of America next week. Strap yourself in. We own WFC and BAC. Consult your own advisor on any stock mentioned here. Do not use this blog for investment advice. We are very long-term investors, not traders. Our average holding time for a stock is near 5 years. We don't buy anything that we plan to hold for less that 18 months to 2 years. This is not the ways of Wall Street, but this is the ways of dividend investing. It works if you have the patience to judge the value of your investments on something other than their current selling prices.