Wells Fargo price-to-tangible book sits at about 1.48 and is trading roughly where it left off before the pandemic. Given that it is now considered more valuable than Citigroup, which doesn’t have an asset cap, it appears that most of the upside in Wells Fargo has been priced in. The main reason for investing in Wells Fargo during the pandemic was because the valuation was ridiculously cheap. At one time, WFC was selling for 60 cents of every dollar of tangible assets. Even if it had to written off assets, the most extreme unlikely scenario was priced in and would still be undervalued if the worst was realized. Back then, investors were worried about its exposure to oil and we know how that played out. Energy was finally the place to be and my best performing investment of late was MPC. So, it was an easy decision to buy WFC at March 2020 lows and again doubling up on WFC in October 2020.
The most disappointing trend has been Warren Buffett unloading his position in WFC. I believe it won’t be long before Berkshire Hathaway has nothing invested in WFC. Although I was right about investing in WFC, I was wrong about Warren Buffett investing in WFC, see my previous article here. I believe that Wells has taken too long to get the asset cap lifted and has not done enough to meet regulatory requirements to avoid problems of employees creating phony accounts. Recently the head of regulatory affairs, Sarah Dahlgren, is leaving Wells Fargo. Either that is because of her poor handling of getting the asset cap lifted or possible frustration with changing the culture at Wells Fargo. I am not sure what it means, but that does create uncertainty on how WFC is progressing towards getting the asset cap lifted. It is possible that Warren Buffett sees this as poor management and he is notorious for preaching avoidance of poorly managed companies. If you can’t trust the leaders and employees of a company, then it doesn’t matter how undervalued it may appear.
Wells Fargo is divesting of its asset management business, which I believe is the wrong direction for the company. Also, Wells tried to sell its private credit card business, but thankfully decided against it. JP Morgan Chase is acquiring businesses and expanding its offerings to customers in order to create a network effect. Although several bad apples lead to the phony account scandal at Wells Fargo, cross selling was the company’s competitive advantage. So, even if asset management is not the best performing business, all the businesses Wells owns are more valuable together than apart. Banking is not the industry that does better when they specialize or focus on a niche. They do better when they can be the company that offers it all to their customers. The banking and insurance industries pay a lot of money to acquire a new customer and avoiding that cost by selling an existing customer another product is what leads to expanding and industry leading profit margins. Wells Fargo has been attempting to run away from businesses that have underperformed their peers instead of figuring out how to beat their competition. That strategy is not a long-term winning strategy.
At 1.48 price-to-tangible book for Wells Fargo is significantly more than Citigroup at 1.04. If I had to choose between the two, I would go with Citigroup. But right now, I am focusing on better opportunities in Virtu Financial (VIRT) and United Wholesale Mortgage (UWMC), which I might right about next.
