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.


Daily return (April 9, 2009)*

Bank of America (NYSE:BAC)


JPMorgan Chase (NYSE:JPM)


US Bancorp (NYSE:USB)


Citigroup (NYSE:C)




*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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