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  • kennethkohwk

WFC looks cheap in an expensive market. 10x fw PE, rising earnings, share buybacks. (20% upside?)

Hi gang, it's been a long while.

I've been busy in other parts of my life. Some people might have known that I lived with an incurable disease for a big portion of my life that took me to depths I never thought possible. I am presently in the midst of a writing journey, recounting significant life experiences and what I learnt from it, about myself, about the world, and about God.

But I thought I'd chime in an idea in the markets.

Right now, the markets are a little expensive, and it's in "profit-taking" mode. I can't be sure when this short term correct will be over, but here's a stock value-investors can take a look at.

Wells Fargo (WFC)

The thesis is very simple.

1) Their quarterly earnings have done well at $1.38 a share. Adjusting for credit provisions, the quarterly earnings at ~$1.08 a share. If you annualize that, that's ~$4.30 a year.

2) In a rising interest rate environment, banks tend to make more money.

3) So, if $1.08 is the floor, then, at today's price of $44.40, this is ~10x PE.

4) 10x PE with good chances of increasing profitability? Sign me up.

Fundamental Price target:

1) Using historical P/B: Between 2010 and 2020 (pre-COVID), the median P/B was 1.5. At 1.1x right now, a revaluation to 1.5x is roughly ~$55-58. This may happen if they are successful in their continued cost-cutting, improving their margins.

2) using P/E ratio: even a non-demanding 12x fw PE valuation brings the price to $52.00. Same ball park.

3) If earning continues to increase this year, its even better.

Of course, it doesn't hurt that the company is resuming it's share buybacks.

WFC is cheap and they have cash to buy their own stocks. They plan to buy up $18B worth, which is worth about 10% of their entire market cap.

The market is, however, in a short-term correction phase. I won't be making any predictions when it will be over. This post is to give you an idea of what WFC could be worth. It seems cheap in an expensive market.

Cheers! Hope everyone is doing well.

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