Wells Fargo's Quarter Was No Surprise

Wells Fargo (NYSE: WFC  ) pre-announced its earnings today and blew away investor/ analyst expectations. Expected earnings per share of $0.55 (after preferred dividends are paid out) trounced the highest analyst estimate of $0.38. As a result, investors lined up to own the shares, sending the stock 25% higher so far today. In fact, the announcement sparked a broad rally in the banking sector; pundits even credited the news with lifting the overall market.

Stock

Daily return (April 9, 2009)*

Bank of America (NYSE: BAC  )

28%

JPMorgan Chase (NYSE: JPM  )

12%

US Bancorp (NYSE: USB  )

13%

Citigroup (NYSE: C  )

10%

SPDRS ETF (NYSE: SPY  )

3%

*At approximately 2:27 p.m. ET. Source: Yahoo! Finance.

Of course, buying the shares once the news is out isn’t a good plan if you’re trying to beat the market (in the short term, anyway). Although no one could have known that Wells Fargo would post a record quarter, there were some elements to suggest that results would be good, and possibly excellent.

Buffett likes banks
Less than a month ago, in “Buffett Likes Banks,” I relayed some of the positive remarks the chairman of Berkshire Hathaway (NYSE: BRK-A  ) made about the banking sector in a widely covered three-hour appearance on CNBC. During the interview, Buffett said:

The banks are getting their money very cheaply, deposits are coming in, spreads have never been wider, all the new business they're doing is terrific. They will earn their way out of it [in the] overwhelming number of cases.

It should be clear that when a bank can borrow at near-zero cost and its marginal competitors have been eliminated (it’s no longer fashionable to offer mortgage loans on uneconomic terms), that can only be described as a positive operating environment. Those factors are borne out in today’s earnings pre-release.

Short-term spike vs. long-term value
If you are a short-term trader, don’t bother acting on the news. If you are a long-term investor, Wells Fargo’s announcement could still have some value in prompting you to re-think your expectations for bank earnings over the next couple of years; indeed, it’s not clear that the best-run banks are fully valued, even after today’s rally -- although they’re certainly closer than they were a month ago.

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Alex Dumortier, CFA, has a beneficial interest in Wells Fargo, but not in any of the other companies mentioned in this article. Berkshire Hathaway is a Motley Fool Inside Value and a Motley Fool Stock Advisor recommendation. The Fool owns shares of Berkshire Hathaway and SPDRs. Try any of our Foolish newsletters today, free for 30 days. The Motley Fool has a disclosure policy.


Read/Post Comments (35) | Recommend This Article (53)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 09, 2009, at 4:55 PM, JibJabs wrote:

    MTB. Buffett is on board with that one too. Room for growth. Worth investigating.

  • Report this Comment On April 09, 2009, at 5:23 PM, Jumonji wrote:

    Your title is a bit misleading... if "Wells Fargo's Quarter Was No Surprise," then why didn't you write this article yesterday and give us a big head's up?

    Bombastic much?

  • Report this Comment On April 09, 2009, at 5:37 PM, paultaut wrote:

    All of the Banks which have made comments, have been positive. WFC even had a positive Shareholder News Letter.

    Its No surprise, to me, but then I loaded up on FAS as the Analysts and those Currency and Commodity experts shot down prospects for the Banks earlier this week.

    Whitney even backed off.

  • Report this Comment On April 09, 2009, at 5:38 PM, wuff3t wrote:

    "Your title is a bit misleading..."

    And why should they? What do they owe you?

  • Report this Comment On April 09, 2009, at 5:41 PM, SurferGrog wrote:

    I'm a little confused you mention long term, but what about all that toxic debt? How does that factor into the long term price of the stock?

    Greg

  • Report this Comment On April 09, 2009, at 5:42 PM, phalkor wrote:

    I want a ham sandwhich now! You owe me at least that much!

  • Report this Comment On April 09, 2009, at 5:42 PM, phalkor wrote:

    I'll take turkey as a second choice.

  • Report this Comment On April 09, 2009, at 5:42 PM, phalkor wrote:

    Don't forget the pickles!

  • Report this Comment On April 09, 2009, at 5:51 PM, edshock wrote:

    Your comment is not really a surprise. To me it make perfect sense that all the financial institutions would have dumped every "toxic"item they had into the 4th quarter of 08, because the market already expected them to have terrible quarterly returns.

    In doing this it simply cleared the way for fantastic 1st quarter of 09. Look at the quarterly of BOA and some of the others.

    The real time to have bought was the middle of January.

  • Report this Comment On April 09, 2009, at 6:02 PM, scotthw wrote:

    Profit ? Sure... Its easy to show a quarterly profit with all those federal $ coming in. Just because their books showed a profit doesn't change the fact they are INSOLVENT, just like JPM, WFC and for that matter the Federal Gov't. A close look at their Level III assets will draw that out.

  • Report this Comment On April 09, 2009, at 6:03 PM, scotthw wrote:

    "just like JPM, WFC"

    Oops, meant JPM, BAC..."

  • Report this Comment On April 09, 2009, at 6:10 PM, JibJabs wrote:

    Don't lump all banks in with Citigroup. Not all assets are equally toxic. Some *rare* banks were responsible and their liabilities are most vulnerable at real estate and manufacturing. The question is, do you think the pain is priced in? Personally, I'm riding small regionals all the way to the bank (please forgive my pun).

  • Report this Comment On April 09, 2009, at 6:12 PM, Nodakbug wrote:

    I have never read where you recommended Wells Fargo stock. If it was no surprise to you why haven't you told us before?

  • Report this Comment On April 09, 2009, at 6:54 PM, sentinelbrit wrote:

    I agree with Nodakbug. All the major commentators on MF and as far as I can see the vast majority of CAPs players have been incredibly negative on the banks. I expected the asset managers at MF who run their portfolios to at least recommend some exposure to the banks - but I have never read a recommendation to buy even a small holding. They have missed one of the biggest opportunities to make a huge amount of money.

  • Report this Comment On April 09, 2009, at 7:17 PM, Melchidael wrote:

    If it was no surprise why did you not tell all of us fools yesterday to back up the truck?

  • Report this Comment On April 09, 2009, at 7:19 PM, Jumonji wrote:

    "...And why should they? What do they owe you?"

    Maybe because I'm a paid subscriber to their stock advice??? They never told me to buy Wells Fargo, and now they're parading around like they knew it all along???

    Which is why I've canceled my subscription. Sure, they have some good services, but I'm tired of all the hyperbole BS. This one is just really over the top.

  • Report this Comment On April 09, 2009, at 7:23 PM, TMFAleph1 wrote:

    Nodakbug, sentinelbrit,

    I refer you to my article of March 11, 'Buffett Likes Banks' (there is a link to it in this article).

    Please note, however, that I never "recommend" stocks in my articles; I merely describe ideas to readers, which readers are then free to investigate and consider these ideas at greater length. I do not encourage anyone to buy a stock solely on the basis of any of my articles.

    Best,

    Alex Dumortier (TMFMarathonMan)

  • Report this Comment On April 09, 2009, at 7:34 PM, TMFAleph1 wrote:

    Jumonji,

    You wrote:

    "Maybe because I'm a paid subscriber to their stock advice??? They never told me to buy Wells Fargo, and now they're parading around like they knew it all along???"

    I appreciate your frustration, but it stems from a fundamental misunderstanding of the way in which the Motley Fool is organized.

    There is a distinction between the Motley Fool's premium stock newsletters (paying services) and Fool.com online content (free content). This article falls under the latter.

    For the most part, the writer/ analysts who produce the free content for Fool.com are not involved with the stock newsletters (that is my case).

    I hope this helps clear things up.

    Best,

    Alex Dumortier (TMFMarathonMan)

  • Report this Comment On April 09, 2009, at 7:42 PM, Jumonji wrote:

    Alex, so you, the free content writer, knew more about Wells Fargo than the Fools we pay for advice? Another reason I'm glad I canceled my subscription.

    Nothing personal, a little levity is fine now and again, but a title like this one is obviously intended to make people think they're less than intelligent for not knowing something so obvious as that Wells Fargo stock would go up so much.

    Tell me - how much did you make today? I mean on Wells Fargo stock, not on selling this story.

    Admittedly, you do tone it down a bit with, "Although no one could have known that Wells Fargo would post a record quarter, there were some elements to suggest that results would be good, and possibly excellent," the title is horrendously condescending to those of us silly enough to pay the fools to tell us these things AHEAD of time.

  • Report this Comment On April 09, 2009, at 7:57 PM, YRDOG wrote:

    This is more sending the hogs to the trough, or should I say sheeple to the slaughter Wells Fargo takes taxpayer money and loads up its balance sheet, while quietly moving the toxic waste off the balance sheet, and announces this Enron accounting as earnings, and people go for this hand over fist. I have a World Trade Center to sell, any takers. There really are some fools out there.

  • Report this Comment On April 09, 2009, at 8:22 PM, TMFAleph1 wrote:

    Jumonji,

    I'll let you in on a dirty little secret of journalism. In a vastly overcrowded media space, the title of an article has a single main purpose: to get the reader to start reading the article. This purpose supersedes any other -- including that of conveying the main topic of the article in a perfectly objective manner.

    Was this quarter's results from Wells Fargo perfectly predictable? Of course not. Was a record quarter a surprise? Yes, to a degree.

    I could have chosen for a title 'Wells Fargo's Quarter Not a Complete Surprise' and this would have indeed been more accurate. However, it's also less catchy. I made my choice of title because I prefer more people read the full article, which explains my position in much greater detail than to aim for a perfectly accurate title.

    Best,

    Alex Dumortier (TMFMarathonMan)

  • Report this Comment On April 09, 2009, at 8:51 PM, Dart65GTConv wrote:

    JPM WILL FIX THIS RUN. NOT THAT I DON"T LIKE WHATS GOING ON KILLING ON TRADES BUT CAUTION IS MY GAME. LOVE 2009 up a plenty and play when I can.

    THANKTOU FROM MR CASH TO DR0PS THAN POPS!

  • Report this Comment On April 09, 2009, at 9:01 PM, Wynt wrote:

    Where is the comparison with todays articles and bank activity with the highly published and commented on Mike whatever at Caylon securities?

  • Report this Comment On April 09, 2009, at 10:31 PM, tatooedagain wrote:

    WHY THE SURPRISE ???? WELLS FARGO got ALL WACHOVIA and their stockholders got the shaft....YOU GIVE ME A BANK like that and my QUARTER WOULD LOOK BETTER TOO.....

  • Report this Comment On April 09, 2009, at 11:20 PM, bigkansasfool wrote:

    It's not a surprise because of the change in account rules. When you go from an accurate accounting practice (mark-to-market) to a free for all mark-to-whatever-the-heck-you-want of course they're going to blow the numbers away.

    What is a surprise is that so many people (including kramer) don't see the facts. In an accurate accounting system this wouldn't have happened because NEW mortgage defaults increased in the last 2 months. This should mean larger write offs if you're accurately accounting for those toxic assets.

    What we've basically done is re-inflate the bubble and recreated the exact elements that got us into this in the first place. Shady accounting, low-interest mortgages, fed flooding the system with money (did this too post 9-11), etc.

  • Report this Comment On April 10, 2009, at 12:06 AM, paultaut wrote:

    We are desperately trying to generate inflation, doing otherwise puts us on equal footing with Japan's Lost Decade.

    I hope we are successful, Deflation will not be pleasant.

  • Report this Comment On April 10, 2009, at 3:36 AM, Dnttrustanalysts wrote:

    All that wisdom in hindsight!

    I just cancelled my membership with MF

  • Report this Comment On April 10, 2009, at 5:15 AM, wuff3t wrote:

    Alex,

    Shame on you for thinking up a clever title for your article.

    Shame on you for expecting people to actually read the content.

    I enjoyed the article. I didn't take it as investment advice, because it was never intended as such. I don't really understand the vehement criticism - people complain that WFC was never a recommended buy, then complain that TMF didn't recommend that they buy it (before the run-up)?!

  • Report this Comment On April 10, 2009, at 5:29 AM, Seano67 wrote:

    "All that wisdom in hindsight!

    I just cancelled my membership with MF"

    Jeezum, all this melodrama over a freaking article. Did you bother to read the author's explanation that he's an independent operator who has no affiliation with any of the Motley Fool's paid services, and that it is not his job nor will he personally endorse any stocks whatsoever? It's right in this thread, if you care to scroll up and read it.

  • Report this Comment On April 10, 2009, at 8:18 AM, multi007 wrote:

    Many comments made here by fellow MW subscribers are still questioning the amount of toxic debt still out there, and how that debt will still hurt the banks. It is my opinion that these toxic assets are getting less and less toxic as home inventories continue to drop, prices continue to stablize, and interest rates continue to drop (or stay flat year over year). When banks continue to borrow from the fed at near zero rates, and lend out to their customers at 4.5-5% rates, that is pure profit to the banks, especially more so when the customer is still paying closing costs on new loans and refi's.

    Too many MF are criticizing this article for not pointing out the common sense in it earlier? Come on people, use common sense!

    Common Sense predictions:

    1) Oil will go back to $80 levels (and higher) within the next 24-48 months. Basic common sense dictates the appetite for oil is depressed during this world wide recession - but once the recession is over, appetite for oil will pick up and prices will return.

    2) Other commodities will return like thunder! Alcoa already started. When demand picks up, so will these stocks.

    3) Consumer spending will return! and retail stocks will too! JCP, KSS, DDS, M, even WMT. With 90% of people still employed but very worried about their own jobs, they are hording cash, as evidenced by the increasing savings rates recorded by the fed. These savings accounts (mine included) are getting larger and larger. Once the recession is over and there is more job security out there, those savings accounts will be emptied in whole sale fashion to the nearest JCPenny or Best Buy! Take JCP.. I bought JCP 2 months ago at $15, even after its big run up, its still $50 off its high. JCP had the same problem in the 1999-2001 time period. The stock dropped from $70 to $12 but returned back up to $70 few years later. This is going to happen again - in fact, it already started.

    4) Las Vegas stocks (and their hotel rooms) have great bargains. Sure there is a small chance of LVS or MGM going bankrupt, but the banks are really trying to avoid this - remember the phrase, if you own the bank one hundred thousand dollars, you have a problem, if you own the bank one hundred million, THEY have the problem. Its in their best interest to re-organize the debt. I bought LVS at $3 a few days ago and I just bought MGM yesterday - yes at the days high (I did not wait for a pull back) at $5.10. Once their debt is renegotiated, and my theory is that they will be, these stocks can see a 40% pop easily. I hate to say they are cheap, but they are. With $100 highs, once the consumer returns (see #3 above), they will return to vegas to spend their hordes!

    Im mean, COME ON PEOPLE - THIS IS COMMON SENSE!

  • Report this Comment On April 10, 2009, at 10:00 AM, laogao wrote:

    To multi007,

    It's nice to see so much optimism that things "always" go back up. Sorry I cannot share it. Even the Government's own numbers show that unemployment is over 15% (U6 number).

    Still a lot of things to happen before that comes down. And a record WFC quarter does not a bull market make.

  • Report this Comment On April 10, 2009, at 3:13 PM, TMT33 wrote:

    Multi007 - Common Sense

    How is the consumer going to start spending again while sitting under a mountain of debt racked up over the last 7-8 years while wages haven't kept pace. I think you'll find that when the recovery comes, it will be tepid at best. The gov't and bulls have been underestimating this situation from the beginning. It will take a while to recover from this disaster and don't forget about the trillions that the government is spending to clean this mess up. Where's it coming from, more taxes or more borrowing from China and the Middle East?

  • Report this Comment On April 11, 2009, at 7:40 AM, multi007 wrote:

    Thanks for the replies laogao and TMT33. Let me add...

    TMT33...I understand the consumer is tight right now, but as I pointed out, there are 90% still employed. The consumers stopped spending because 1) They lost their jobs, 2) they are afraid they WILL loose their jobs, or 3) available credit has tightened making it impossible to spend. Americans live their lives on credit - as evidenced by the large #s of household debt. This has been engrained in our DNA since 1980's. We are so use to this mindset. I believe that once the consumers feel that their 1) savings accts are huge, 2) no longer fear job losses, 3) credit is relaxed - these consumers will return to the behavior of spend spend spend. And it will start with their large savings accounts and continue into a deepening debt. You cant change a person's personality... and we do live in an instant gratification society - blame the "I can get it now" mentality of the internet. I see it everyday as a public high school English teacher. The kids today ages 15, 16, 17 are only being affected by this recession because they cant get that "part time after school job". Once they can spend, they will spend. There may be a small percentage of people who will live differently, but that I think will only be a fad until their memory of this recession is past.

    Its safe to say taxes will go up. But for now, and more specifically, taxes will return to Bill Clinton levels. Remember, we WERE at a 39% tax rate under Clinton. Bush brought us to 36%. There will be other taxes sure, that's a no brainer, but I feel they wont make a marked difference to the majority of Americans. Read this for a moment - quote taken from http://www.latimes.com/business/la-fi-deduct14-2009mar14,0,6...

    "Under the budget plan, households now subject to 33% and 35% rates would be able to claim deductions only at a 28% rate. So for every $1,000 in deductions, a top-bracket household would save $280 in taxes, down from $350.

    Current law eliminates the deduction for mortgages of $1 million or more, and that limit would remain. If approved by Congress, the new rules would go into effect in 2011.

    Richard Green, director of USC's Lusk Center for Real Estate, said the Obama proposal -- which he supports -- may well be "sort of the nose under the tent on the way to getting rid of the mortgage interest deduction entirely."

    In the U.S., the home mortgage write-off is used by about 35% of taxpayers who itemize their deductions, generally a more affluent group. Roughly 90% of taxpayers who earn more than $100,000 itemize deductions, while about 18% of those earning less than $50,000 do so, according to the Tax Foundation, a nonpartisan educational group."

    These taxes (or the removal of a deduction) wont hurt a majority of Americans yet will generate alot of revenue for the govt. Although I dont agree with the "tax the wealthy" idealogy, it is what it is.

    Wth unemployment (ue) being a lagging indicator, and the last ue numbers being flat (actually down 20,000 losses) I think the majority of companies who were going to lay off, have already. I still think our recession will not end for 24-48 months, however since the market is a leading indicator, my opinion is that this is the bottom and that the buy orders for equities should occur now. Heck, even if there is a 10% drop from here, these prices of many high quality stocks cant be ignored.

    laogao - The bears would say there are too many data points to show this bear market will continue for years. The bulls will say, wow - look at that WFC pop - The worst is over. Im personally in the bull camp. You are right, "a record WFC quarter does not a bull market make." However what is did do was change the market mentality and sentiment. There is a ton of $$ on the sidelines. Any sign of good news in the market is going to cause these huge pops simply by people moving small percentages of their money market cash into equities.

  • Report this Comment On April 13, 2009, at 11:15 AM, Matt8265 wrote:

    It's my opinion, and supported by fact, that M2M is allowing and encouraging banks to NOT take their losses, and thereby post profits that tare not real. You keep buying those banks late bloomers... I'll be shorting them with SKF.

    GS and others are running them up to dump shares on the unsuspecting.

  • Report this Comment On April 13, 2009, at 11:16 AM, Matt8265 wrote:

    BigKansas.... Cramer knows EXACTLY what the facts are. He's part of the scheme.

    Whatever Cramer says, you'll thank yourself later to do the opposite!

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