Wells Fargo: A Slam Dunk?

03/14/2016 7:00 am EST

Focus: STOCKS

Jim Powell

Principal Analyst, Global Changes & Opportunities

I have almost always done well with fallen angels in the banking sector. I don’t think you need a crystal ball to see their potential, explains Jim Powell, editor of Global Changes & Opportunities Report.

In a modern economy, banks are as essential as energy companies. That’s why the major banks make big rebounds whenever economic conditions start to improve.

Big banks throughout the world have taken big hits in recent months as investors worried about overall economic problems. However,
I believe a bank recovery is a slam-dunk for long-term investors.

Nevertheless, I think the odds favor another downturn for the stock market and additional concerns about bank profits. So, as tempted, as I am to rate our banks “OK to buy”, I will recommend holds instead.

One exception is Wells Fargo (WFC), which I think is an attractive buy. It is now the largest of America’s “big five” banks – and it is also the most efficient.

During 2015 when US growth averaged just 2%, Wells Fargo’s deposits grew 6%, commercial real estate loans jumped 10%, and the bank opened 2.7 million new credit card accounts. Those are impressive numbers that should continue to improve this year.

One concern about WFC is that the bank loaned $17 billion to the energy industry before the oil price plunged.

Some of those loans are now in jeopardy. However, the bank recently allocated $1.2 billion for possible defaults, an amount that I believe to be adequate.

In any event, the energy loans are old news and are undoubtedly reflected in the stock price.

Lastly, Wells Fargo has attractive fundamentals, which also sets it apart from the pack.

In a sector where good dividends are hard to find, the stock has a 3.12% yield. The P/E is a low 11.6. I think the stock will be a winner in long-term accounts.

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