The Best Bank Today: Wells Fargo & Co or JPMorgan Chase & Co.?

This bank kept things simple, and you should too.

May 10, 2014 at 9:00AM

Investing in banks has normally brought me consistently great returns because the business model of a bank is, at it's core, very simple, and the services that they offer will always be in demand. With the S&P 500 up over 140% in the past five years, however, it's getting harder and harder to find undervalued stocks worth buying and holding for the long-term.

In spite of the rise in the market, Wells Fargo (NYSE:WFC) remains the one bank that has perfected its core business of banking and remains an incredible investment regardless of valuation.

Best in breed
On the surface, Wells Fargo may not seem like the best bet of the big banks from a value perspective. With a P/E ratio of over 12 and a P/B ratio of about 1.7, Wells Fargo isn't especially exciting. However, Patrick Morris at The Motley Fool does an excellent job of pointing out how great Wells Fargo is compared to its peers.

Morris highlights several important valuation metrics for banks. In the article, he looks at Wells Fargo's return on average assets (the profitability of a company's assets), return on equity (how much profit a company generates with its shareholders' money), and net interest margin (how well a company's investments perform when compared to its debts). When compared to its peers, Wells Fargo is performing at a much higher level. But if you are looking for more convincing than Mr. Morris provided, let me take a crack at it.

Banks behaving badly
The financial crisis that occurred in 2008 hit the banking sector hardest of all, with several large banks failing and other large banks barely surviving with the help of government bailouts. This crisis, in case you had forgotten, was a direct result of the reckless behavior of many of these banks to begin with. But not all of the banks were behaving badly. So how can we tell the good from the bad? The "bad banks" responsible for the crisis had to pull out all the stops to avoid bankruptcy, which often included selling assets. The "good banks" were able to take advantage of the opportunity to actually expand and grow their businesses, much like astute investors were able to take advantage of the low share prices the crisis provided to buy stocks and achieve large financial gains during the recovery. 

Getting down and dirty
To see which banks were in the best position to expand their asset holdings, we can compare the current total assets of these banks to the assets they held prior to the crisis.


Total Assets: December 2007


Total Assets: December 2013


% Change
Citigroup 2,187 1,880 -14%
Bank of America 1,716 2,102 23%
Wells Fargo 575 1,527 166%
JPMorgan Chase 1,562 2,416 55%

A quick look shows us that three out of the four banks increased their total amount of assets. Wells Fargo stands out, however, by more than doubling in size.

But before we get too excited about these banks buying up assets, we need to know exactly how they are raising the cash for these asset purchases. Let's look at a table that shows how the number of outstanding common shares of these banks (in billions) has changed over the same six-year period.


Share Count: December 2007

(in millions)

Share Count: December 2013

(in millions)

% Change
Citigroup 500 3,042 508%
Bank of America 4,480 11,491 156%
Wells Fargo 3,383 5,371 60%
JPMorgan Chase 3,508 3,815 9%

By comparing share counts, you can see the way Bank of America paid for a large portion of its 22% expansion in total assets: by selling more shares of common stock and diluting its shareholders! Wells Fargo has also raised money by selling shares, but a 58% increase in shares to help fund a 165% increase in assets seems more than reasonable from a shareholder's perspective. JP Morgan has treated shareholders the best of these four banks by only diluting by 9%.

The price of profits
After looking at dilution and asset purchases, it is pretty clear that Wells Fargo and JP Morgan are the two finalists for "best in breed" from this bunch. But, while these two banking giants might seem similar on the surface, their underlying businesses couldn't be more different. In fact, you only need to go as far as their most recent earnings reports to see the difference between the two. JP Morgan reported a first-quarter drop in net earnings of 19%, and the bank's dependence on trading revenue played a large role. On the other hand, Wells Fargo reported a 14%  gain in Q1 earnings that included $38 billion in mortgage originations and $7.8 billion in auto loan originations, both of which dwarfed the corresponding numbers at JP Morgan.

It's true that, from a value perspective, it doesn't matter where a company's profits comes from. But from a risk perspective, JP Morgan's reliance on its investment banking profits is a snake in the grass that could spring up and bite its shareholders at any time. Wells Fargo's focus on its mortgage business and its community banking unit provides a far more stable and predictable source of income for shareholders.

Is this new player a threat to the best in the land?
There's a brand-new company that's revolutionizing banking, and is poised to kill the hated traditional brick-and-mortar banks. That's bad for them, but great for investors. And amazingly, despite its rapid growth, this company is still flying under the radar of Wall Street. To learn about about this company, click here to access our new special free report.

Wayne Duggan is the author of Beating Wall Street with Common Sense and the developer of Wayne Duggan owns shares of Bank of America and Wells Fargo. The Motley Fool recommends Bank of America and Wells Fargo. The Motley Fool owns shares of Bank of America, Citigroup, JPMorgan Chase, and Wells Fargo and has the following options: short June 2014 $50 calls on Wells Fargo and short June 2014 $48 puts on Wells Fargo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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