Dear Mr. Berko: In January of 2010, my broker had me buy 200 shares of Wells Fargo at $28, and it still sits at that price.
He thinks I should buy 200 more shares because his firm has a “strong buy” on the stock. He tells me that earnings, dividends and deposits are growing — and so is its loan portfolio — and that it will produce record profits this year.
Please tell me what you would do. –FP in Vancouver, Wash.
Dear FP: Wells Fargo (WFC, 52-week high of $34.25 as of Feb. 8) hogtied Wachovia’s management, searing the WFC brand on thousands of Wachovia properties.
Sadly, about 11 percent of Wachovia’s 110,000 employees will be pink-slipped from a good bank that began taking deposits 135 years ago and has always been in the black. And another memorable piece of America vanishes into the dust and memories of the past, sort of like trashing a collection of Norman Rockwell paintings.
The purchase of Wachovia gives WFC 11,000 offices, 280,000 employees and $1.3 trillion in assets and catapults it to one of the top-tier banks in the U.S.
WFC is unquestionably a well-managed bank. Most problem loans have been banished from its balance sheet. Its solid loan portfolio is expected to grow by 8 percent this year, and core deposits should grow by 3.5 percent.
Bank stock gurus believe that net interest income will improve by 7 percent in 2011, that capital cost will decline about 2 percent, that noninterest income will advance by 5 percent, that 2011 share income could increase 30 percent to $2.85 and that there is enormous potential for significant dividend growth.
WFC is a jim-dandy bank run by highly regarded management that remained profitable through the worst of the 2008-09 recession.
WFC is among the most admired banks on the Street. Twenty-two analysts have a “buy” recommendation on the shares, some of whom believe the stock could rise to $49.
While I doubt WFC can reach $49 this year or next, I share their enthusiasm for WFC’s uncommon excellence. So do Warren Buffet, Vanguard, Wellington and BlackRock, who own 342 million, 182 million, 169 million and 130 million shares, respectively.
However, some officers and directors who sold more than 600,000 WFC shares this year are not among this large sanguine group. And I’m inclined to pitch my tent with this much smaller group.
I admire the WFC business model and believe its management easily out-manages their starched-collar colleagues at Bank of America, JPMorgan and Citigroup. But I can’t abide by a bank that’s bigger than King Kong, that has 280,000 employees and 5.5 billion shares outstanding (25 shares for every U.S citizen) and trashed a rain forest mailing 200 pages of legal dung to hundreds of thousands of customers announcing its Wachovia acquisition.
What in the name of Tolliver’s cat was management thinking when they sent that palaver to depositors, most of whom don’t know the difference between compound interest and a compound fracture?
It’s been my observation that when most companies rapidly increase their size, the volume of wise management decisions varies inversely to the speed of its growth. And that $262 million mailing may be its first dumb mistake.
While I hold WFC in high regard, I doubt it will move to the high $30s this year, and I’ll be gabberflasted if it reaches the low $40s. WFC has become so big that its moving parts need moving parts, and I’m concerned management may lack the ability to run its new huge enterprise. This is my main concern.
Your broker is stone dumb. Tell him to put a gherkin in his ear, and don’t you buy another share.
Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775 or e-mail him at email@example.com