On Monday, Goldman Sachs (NYSE:GS) upgraded Wells Fargo (NYSE:WFC) from "neutral" to "attractive," citing the Wachovia acquisition as a long-term earnings driver. The market's response was unequivocal, with the shares gaining 7% on the day to close at $28.09. They're up slightly since then. Did you miss the train, or is the giant California lender still worth buying?

At first glance
Relative to its peer group, Wells Fargo shares look pricey on the basis of price-to-book value multiples:

Company

Price/Book Value

Price/Tangible Book Value

US Bancorp (NYSE:USB)

1.830

3.680

Wells Fargo 

1.570

2.920

JPMorgan Chase (NYSE:JPM)

1.170

1.840

PNC Financial

1.100

2.400

Bank of America (NYSE:BAC)

0.747

1.510

Citigroup

0.330

0.608

Source: Capital IQ, a division of Standard & Poor's.

Nevertheless, Wells Fargo has consistently traded at a premium to its peers. So let's take a look at different indicators.

Tracking the "chairman indicator"
Last June, Wells Fargo Chairman Dick Kovacevich bought approximately 40,000 of his bank's shares on the open market at $26.05 per share -- his first share purchase since 1998, at a price that is 9% below today's prices:

Date

Number of Shares/Average Price

Wells Fargo
Total Return

S&P 500 Total Return

KBW Bank Index Return

June 6, 2008

40,398 @ $26.05

18%

(20%)

(33%)

With hindsight, purchasing shares at the beginning of June 2008 proved to be too early. At that time, very few people could foresee the Lehman Brothers bankruptcy, the Treasury's involvement, or the March 2009 market low. Nonetheless, despite these events, the return on that transaction has already far exceeded that of the broad market and the banking sector.

"Highly actionable"
Around the time of the purchase, Michel Painchaud of research company Market Profile Theorems, called insider purchases at Wells Fargo "highly actionable" -- a reliable "buy" signal -- based on his company's model that tracks insider activity at Wells Fargo, including Kovacevich's buying and selling history.

Painchaud went on to say that Kovacevich has been a prescient seller, earning the highest possible accuracy rating for his insider transactions. With his next purchase of shares, Kovacevich showed he's equally canny when it comes to buying:

Date

Number of Shares/Average Price

Wells Fargo
Total Return

S&P 500 Total Return

KBW Bank Index Return

March 5, 2009

100,000 @ $8.05

254%

57%

145%

Kovacevich hit it out of the park and into the parking lot that time; in fact, his timing was near perfect. March 5 marked a 13-year low in Wells Fargo's stock; Kovacevich picked up 100,000 shares, paying just a quarter of a dollar over the intraday low. The early comparative returns suggest this will prove to be a remarkable investment.

(You may think I have cherry-picked Painchaud's comments after the fact. In truth, I made note of them at the time and went on to buy Wells Fargo in July 2008, paying $22.75 per share.)

Looking back: valuation and performance
Another way to analyze Wells Fargo without resorting to a peer-group comparison is to look at its valuation in a historical context. Wells Fargo shares are changing hands around 1.6 times book value. Looking at the historical series for this multiple from Capital IQ, which starts at the beginning of March 1994, shows that shares never traded this low prior to the credit crisis. The price-to-book value multiple reached a low of 1.90 on Dec. 1, 1994. The following table shows the shares' relative performance since then:  

Date (P/BV Multiple)

Wells Fargo
Annualized Total Return

S&P 500
Annualized Total Return

KBW Bank Index
Annualized Return

Dec. 1, 1994

1.90

15.2%

7.9%

4.1%

An annualized return of 15.2% over a 15-period is a fine performance, and it's all the more impressive since it got no help from the multiple, which declined 16% over that period.

Wells Fargo's current price-to-tangible book value multiple is 2.92. Here, there is precedent for lower values: The multiple saw values less than 2.92 in nearly every month over a 38-month period between 1994 and 1997. However, even had one bought the shares at the highest valuation during that period -- a price-to-tangible book value of 3.35 -- one would still have made out very well:

Date (P/TangBV Multiple)

Wells Fargo
Annualized Total Return

S&P 500
Annualized Total Return

KBW Bank Index
Annualized Return

Feb. 25, 1997

3.35

9.4%

3.9%

(2.4%)

Putting it all together
Wells Fargo is a superbly well-managed organization; it's little wonder that Warren Buffett's Berkshire Hathaway (NYSE:BRK-A) (NYSE:BRK-B) is the largest shareholder. I think Goldman's assessment is correct; the market has not fully accounted for the incremental earnings power of Wachovia. Wells Fargo shares are no longer a screaming buy, but I do expect them to beat the market's return by several percentage points. However, investors shouldn't expect outperformance similar to that of the last 15 years. After all, Wells Fargo is now the nation's third-largest lender by total deposits and market capitalization.

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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 Stock Advisor and Motley Fool Inside Value recommendation. The Fool owns shares of Berkshire Hathaway. The Motley Fool has a disclosure policy.