There are very few stocks that meet the criteria of "forever" investments, and even fewer in the banking sector. However, one that does qualify is Wells Fargo (NYSE:WFC). Aside from being the largest U.S. bank in terms of market capitalization, there are plenty of reasons to believe that Wells Fargo will be a safe and profitable investment for the long haul.
What makes a "forever" stock?
There are a few criteria that need to be satisfied before I can say that a stock can be bought and held forever.
First, the company must have a relatively simple and low-risk business model that's easy to understand. If you can't describe what a company does in a sentence or two, and explain why it's not very risky, it may be a good buy-and-watch candidate, but not a forever investment.
Second, the company needs to have histories of shareholder-friendly management, avoiding unnecessary risks, and consistently paying, if not increasing, its quarterly dividend payout.
Finally, and most importantly, the company needs to have a wide moat, which is one of Warren Buffett's most effective stock-picking criteria. Essentially, what this means is there must be a distinct advantage to the company as well as the type of business that will help it withstand the test of time.
So, why Wells Fargo and not the other banks?
First, the business model is simple, especially when you compare it to other big U.S. banks. Unlike Citigroup, Bank of America, and JPMorgan Chase, which rely on investment banking operations, trading revenue, and other income streams to stay profitable, Wells Fargo operates more like a traditional savings and loan.
The company does have a small amount of ancillary operations, but basically all of Wells Fargo's business can be explained in a single sentence: Customers deposit money into accounts, and then Wells Fargo lends the money to other customers at a higher interest rate. This is an oversimplification, of course, but it isn't too far off the mark.
Wells Fargo's business definitely has a wide moat. The business itself will always be in demand, as people always need a safe place to keep their money, as well as a way to borrow money for major purchases. And Wells Fargo's size gives it a unique competitive advantage, allowing it to use economies of scale to cut costs and run more efficiently. After all, the next largest bank that focuses on the savings and loan business is many times smaller than Wells.
Even though it's a big bank, moreover, it continues to post impressive growth numbers. In its most recent earnings report, it showed a 4% year-over-year increase in average loans and an 8% increase in average deposits. Credit quality and charge-offs continued to improve, and somehow the bank is getting even better at cross-selling, an area in which it's known as an industry leader. In fact, the percentage of Wells Fargo's banking households who have a credit card with the bank rose from 37% to 41.5% over the past year alone.
Now is as good a time as any to jump in
Sure, Wells Fargo is currently trading close to its 52-week high, but that doesn't necessarily mean it's a bad time to buy shares in the California-based bank. As Charlie Munger taught Warren Buffett long ago, it's "far better to buy a wonderful company at a fair price than a fair company at a wonderful price." And Wells Fargo is exactly that -- a wonderful business that's trading at a fair (but not great) price right now.
One strategy that's useful with forever stocks like this is dollar-cost averaging. That means buying a set dollar amount of the stock at regular intervals, such as quarterly. When the price is high, your investment will buy fewer shares. When the price is low, you'll end up buying more shares at the cheaper price than you did at the more expensive price. By doing so, you effectively take the fluctuations in value out of the equation.
What could change my mind, and could it happen?
The only reason I would stop thinking of Wells Fargo as a forever investment is if something significantly changes its business model. If Wells Fargo decided to start engaging heavily in investment banking, risky subprime lending, or anything other than what it's doing now, for example, I would have to take a step back and re-evaluate my thoughts.
However, Wells Fargo has been so successful precisely because its business model hasn't changed much over the years, so I don't see any reason it would start now. Wells Fargo is the best-in-breed and its easy-to-understand services will always be in demand. As long as these things remain true, it's an excellent choice to buy and hold for as long as you can.
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Matthew Frankel owns shares of Bank of America. The Motley Fool recommends Bank of America and Wells Fargo. The Motley Fool owns shares of Bank of America, Citigroup Inc, JPMorgan Chase, and Wells Fargo and has the following options: short April 2015 $57 calls on Wells Fargo and short April 2015 $52 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.