Wells Fargo: Another Opportunity From A Buffett Sell-Off

Wells Fargo: Another Opportunity From A Buffett Sell-Off

As Wells Fargo (WFC) finally breaks out from the virus lows, the stock has plenty more upside. The Warren Buffett exit likely helped create an artificial low in the stock similar to the airlines earlier this year. My investment thesis remains bullish on the bank stock returning to pre-virus highs and beyond.

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Image Source: Wells Fargo website

Another Mistake

Unfortunately for investors following Buffett, the investment genius appears to be causing lows in value stocks. Instead of loading up on airlines and banks at the lows, Berkshire Hathaway (BRK.B) (NYSE:BRK.A) dumped these stocks and pushed them even lower. Back as COVID-19 was raging in April, Buffett claimed on CNBC to have exited all of his airline positions. Berkshire had a nearly $9 billion position in airlines going back to just mid-March

A stock like Delta Air Lines (DAL) opened around $20.75 the following trading day and the stock is now trading at $42. While Berkshire Hathaway exited at higher valuations, anybody following his actions would’ve sold Delta closer to $20 as CNBC detailed these opening prices for airline stocks following the announcement by Buffett.

Buffett had up to $7 billion in airline stock before he quickly unloaded shares during April. The move resembles the recent exit of large bank stocks with a primary focus on Wells Fargo.

Buffett had an average purchase price of around $24 despite holding the stock for over a decade. The ironic part is that Buffett appears to have started selling Wells Fargo at the lows due to the hiring of outsider Charlie Scharf. Buffett and investment partner Charlie Munger appeared dissatisfied with the CEO working from New York and having a history at a Wall Street bank.

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Source: Bloomberg

According to Bloomberg, CEO Scharf hasn’t visited Omaha since being hired a year ago like previous Wells Fargo CEOs. In addition, Buffett had previously told the Financial Times that the large bank shouldn’t hire someone from a Wall Street firm. Apparently, Berkshire started selling shares three weeks into Scharf’s tenure.

Berkshire still owns 130 million shares at the end of September for a 3.3% position of the stock after spending years holding a nearly 10.0% position. The investment firm sold the vast majority of the shares after the stock crashed due to COVID-19 weakness caused by credit losses and a big dividend cut.

Bad Timing

Whether or not Buffett and Munger agree with the CEO hire, selling Wells Fargo at the artificial virus lows appears to be some of the worst investment timing in the history of the partnership. The stock was down 50% for the year due to large credit losses in Q2.

The common sense surrounding the stock after the COVID-19 crisis was a future restructuring to reduce costs and improve the efficiency ratio. In fact, Wells Fargo had a path to boost earnings far above the pre-COVID-19 levels. Maybe Buffett is right that Scharf isn’t the best long-term solution, but any outside CEO was the answer to start a restructuring and eventually remove the Fed asset cap. Back in 2019, the Charlotte Observer highlighted how the board was looking for an outside executive after Congress and regulators constantly criticized previous CEO Tim Sloan as an insider. If anything, new CEO Scharf appears the right candidate for the job based on his digital experience at Visa (V) and leadership position at other banks.

Selling Wells Fargo in the low $20s was the worst timing possible considering the enormous upside on a vaccine solving the economic problems leading to the massive credit losses. The large bank already cut those losses in Q3 and the vaccine is set to start being distributed in weeks with the FDA likely approving the Pfizer (PFE) vaccine on December 10.

Combine the likely snap back rally in the financials and the additional upside potential in Wells Fargo digitally transforming the business and cutting $10 billion in costs, the stock was a no-brainer to own when Buffett was selling. The stock still trades below tangible book value while Bank of America (BAC) and JPMorgan Chase (JPM) are well above TBV levels. Only a few years back, Wells Fargo still traded above the multiples of these other banks which include Citigroup (C).

Data by YCharts


The key investor takeaway is that Wells Fargo is a cheap bank stock even after this rally to $28. Buffett selling shares likely created an artificial low in the stock similar to airlines earlier this year. Delta Air Lines is already up over 100% from the lows created by the investment guru dumping shares back in April.

As the economy normalizes in the next year, Wells Fargo should have a path to replicate 2019 earnings of $4.05 per share. The icing on the cake for long suffering shareholders is the potential for the new management team to eliminate $10 billion in expenses, boosting EPS far above previous levels. The stock remains a great deal at $28 for those investors that missed the opportunity to buy the stock below $24 for months.

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p id=”a-disclosure” class=”p p4″>Disclosure: I am/we are long WFC, C. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion or consult a financial advisor. Investing includes risks, including loss of principal.

Credit: SeekingAlpha

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