This is a year that's tested the resolve of investors like never before. The panic and uncertainty associated with the coronavirus disease 2019 (COVID-19) pandemic sent equities screaming lower during the first quarter, with the S&P 500 losing over a third of its value in under five weeks.
But following the quickest bear market decline in history was the fastest rally on record. It took less than five months for the S&P 500 to go from a bear market bottom to new all-time highs.
Volatility has become a staple of 2020 -- but that's not necessarily a bad thing. Even though wild vacillations in the stock market can be worrisome and unnerving, they also open the door for long-term investors to buy into great stocks at a discount. Despite the stock market hitting new highs recently, value and opportunity still abound for the patient investor.
If you have cash that you're looking to put to work and time is your friend, my single best investment idea for September is a brand-name company with roots that date back almost 170 years. Ladies, gentlemen, and investors alike, the time to buy money-center bank Wells Fargo (WFC -0.73%) is now.
Wells Fargo will have to overcome two key hurdles
However, before digging into the various reasons why I believe now is the time to take a position in Wells Fargo, it's important to first understand why the company's stock has lost more than half of its value in 2020, and why it's been a chronic underperformer of its peers in recent years.
The company's recent underperformance can be blamed on COVID-19 (surprise!) and the ensuing recession. Bank stocks are inherently cyclical and reliant on an expanding economy to drive loan and deposit growth. The coronavirus pandemic sent the U.S. economy into its steepest quarterly contraction in decades, and that's been bad news for banks.
You see, the COVID-19 recession hits banks like Wells Fargo on two fronts. First, the Federal Reserve has lowered its federal funds rate back to historic lows. This means less in the way of interest income for the foreseeable future. The other issue is that recessions almost always lead to an increase in loan delinquencies. Thus, at a time when interest income is falling, banks are having to set aside capital to cover an expected rise in loan- and credit-related losses. It's certainly a double whammy, and it led Wells Fargo to report a loss in the second quarter -- its first quarterly loss in 12 years.
The other big hurdle for Wells Fargo dates back to 2016, when it was uncovered that the bank had opened unauthorized accounts as part of an aggressive cross-selling campaign at the branch level. In 2017, Wells Fargo announced that 3.5 million fake accounts had been created. This admission eventually led Wells Fargo to pay $3 billion in February 2020 to settle a civil lawsuit and resolve criminal prosecution from the U.S. Justice Department.
In other words, we're talking about a loss of trust between Wells Fargo and consumers, as well as investors.
Here's why now is the right time to invest in Wells Fargo
All of this might sound awful and have completely turned you off on the idea of investing in Wells Fargo. But it shouldn't. If I've learned anything about well-capitalized money-center banks, investing when the outlook is gloomiest often proves to be the right decision.
The first thing to note about Wells Fargo is that while it has made mistakes, public relations flubs seem to be something of the norm for money-center banks. Following the financial crisis, Bank of America (BAC -0.51%) paid out more than $60 billion in settlements, much of which was tied to its mortgage practices. BofA also tried to charge its customers a debit-card usage fee in late 2011, which the bank quickly abandoned a few weeks later. Although Bank of America was highly unpopular in 2011, it's seen its key growth metrics rise for years. The same can be true for Wells Fargo. When it comes to the company's fake-account scandal, time really can heal all wounds.
One of the most interesting differentiating factors for Wells Fargo, relative to its peers, has been its penchant for luring affluent clients. Well-to-do customers have always been a key growth driver for the company given that the wealthy are less inclined to change their spending habits when inevitable economic hiccups arise. The rich are also more likely to take advantage of multiple product offerings, such as a checking/savings account, one or multiple lines of credit, a mortgage, and wealth management services.
Wells Fargo also has a history of delivering above-average return on assets (ROA) relative to its peers. ROA represents the amount of net income a bank produces relative to its total assets. Most banks target an ROA that tops 1%. In Wells Fargo's case, its ROA ranged between 1.3% and 1.4% prior to its scandal, and around 1.1% afterwards, even with increased scrutiny and fees. Wells Fargo has always had a knack for delivering superior returns on its assets, and I believe that can be the case again.
Something else for investors to consider is the caliber of the company's current CEO, Charles Scharf. Though I'm certainly not thrilled with the idea of Wells Fargo having had three CEOs in just over three years, Scharf looks to be the right person for the job. Prior to holding the reins at Wells Fargo, he was the CEO of payment processing behemoth Visa between 2012 and 2016. During that time, Visa's per-share profits doubled.
Finally, consider Wells Fargo's valuation. Currently, investors can buy into one of the oldest and most successful money-center banks for just 64% of its book value, which is the company's cheapest price-to-book valuation since March 2009. Keep in mind that Wells Fargo remains well-capitalized and appears prepared to navigate whatever the pandemic throws its way. For a bank valued at between 20% and 80% above book value throughout much of the 2010s, and more than double its book value between 1998 and 2008, I'm inclined to believe that a reversion to historic norms is coming.
Patient investors in Wells Fargo should be handsomely rewarded.