Bank on Wells Fargo

10/17/2013 8:00 am EST

Focus: STOCKS

Richard Stavros

Analyst, Global Income Edge, Utility Forecaster and Personal Finance

Our latest recommendation is the fourth-largest bank in the US by assets, and the largest bank by market cap; it is also the second-largest bank in deposits, home mortgage servicing, and debit cards, notes Richard Stavros in the Inflation Survival Letter.

The firm's strong balance sheet and overall financial performance, particularly since the 2008 financial crisis, makes this bank a standout as an inflationary hedge.

The bank's robust mortgage lending exposure—though presently in a temporary lull—and large bank depositors, would help the firm access high-quality and diverse lenders, which, in turn, would allow the bank to pass through rate or fee increases in response to increases in the price level.

Securities markets would be adversely impacted by an inflationary period. However, we believe the overall trend of Baby Boomers retiring and the need for investment advice, as well as the size of the bank's brokerage advisory, would, to a great extent, offset negative impacts from declining stock and bond markets.

The bank's low exposure to investment banking, at only 5% of fees, would also insulate the firm from financial losses, as compared to other banks, as business activity declines.

Wells Fargo (WFC) has a unique designation as a value investment; and we know Warren Buffett, the world's foremost value investor, has long had Wells Fargo in the Berkshire Hathaway (BRK-A) portfolio.

The performance of the company in the last few years does bear out Mr. Buffett's confidence in the stock. Wells Fargo, according to its annual report, delivered net income of $18.9 billion in 2012, up 19% from 2011.

This was the fourth consecutive year of record profit. The firm grew its loans and deposits, despite an uneven economic recovery, and grew revenue in a low interest rate environment that had pressured the bank's margins.

Wells Fargo continues to show all of the hallmarks of what value investors seek. The bank boasts a price-to-earnings-to-growth ratio (PEG) of under one (which means it is fairly valued), while also sporting a dividend of 2.79% and low payout ratio of 57%, indicating the dividend has room to grow.

Finally, the bank has continuously looked after its investors, returning earnings-per-share, diluted quarterly, year-over-year. Growth of 19.51%.

As one of the strongest retail banks in America, with little exposure to potentially problematic investment banking, Wells Fargo is the newest addition to our Thrive Portfolio as a buy up to $45.

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