Is Wells Fargo Running Into a Buzz Saw?

With more than 5,400 stocks to choose from, the universe of investment possibilities is enormous. You could get tips over the company water cooler or from Internet discussion boards. A better way might be to look for stocks based on what you already know and own.

Motley Fool CAPS helps you focus your energies by providing you with a personalized Stock of the Day. Using its supercomputer, it looks at stocks currently in your active pick list, stocks picked by highly rated players with lists similar to yours, industries in which you currently have active picks, and Saturn's orbit around the sun. Well, maybe not that last one -- but it targets areas in which you already have an interest.

By pairing up the opinions of some of the top investors in the CAPS community, CAPS provides you with a handful of companies on which to begin your own due diligence and research.

Based on my outperform ratings on banks such as Hudson City Bancorp, Northern Trust, and PNC Financial Services (NYSE: PNC), as well as my underperform rating on National Bank of Greece, the CAPS supercomputer thought I also might be interested Wells Fargo (NYSE: WFC), one of five Stocks of the Day it offered up for my consideration this week.

Let's see what the money center has going for it that might warrant an investment, even if it hasn't yet picked it for you. Just remember, as smart as the CAPS algorithm may be, it's still just an algorithm, so be sure to look before you leap on any of its suggestions.

Wells Fargo snapshot

Sources: Motley Fool CAPS; S&P Capital IQ.

Buy what you know
Banks are apparently doing more with less these days. From Wells Fargo to Citigroup (NYSE: C), we're seeing lower revenues turn into higher profits, though JPMorgan Chase (NYSE: JPM) showed less interest income and net income in the fourth quarter. For the full year, it was the same story as its peers. PNC, for its part, failed for both periods (though ignoring the gain from discontinued operations last year, it eked out a gain year on year).

Despite Wells' total interest income falling almost $600 million, or 4.6% in the fourth quarter, it was able to reduce its provisions for credit losses by nearly $1 billion so that net interest income after provisions was up almost $800 million year over year. Along with some ephemeral non-interest operating expenses, it was able to reduce by about $600 million and -- voila! -- Wells produced $690 million more in net income in the fourth quarter than the previous year and $1.5 billion more for the year.

Citgroup also saw revenues drop 4.8% in the fourth quarter, but it was down sharply for the year at 11% to $48 billion. But unlike Wells, Citi's operating expenses soared 6% in the quarter and 7.5% for the year. Yet it also was able to cut its loss provisions 43% in the fourth, though not enough to help profits, which fell 26% year over year. Now Citi's profits were up in 2011 to $11 billion, though no doubt they were helped along by cutting its loan loss provisions by more than half.

You can bank on it
This is one of Warren Buffet's largest stock holdings, and there's a reason he's upped his stake in the bank over time. As the recent stress tests showed, its Tier 1 common capital ratings soared over the past two years to more than 6% in a stressed scenario, meaning it's on very firm financial footing. Citi, on the other hand, failed to gain approval for its capital plan, as did Ally Financial, SunTrust, and MetLife. They won't be able to raise their dividends or buy back shares without raising more capital.

It explains why Wells is a less risky venture and underscores the conservative nature of its management team. It also explains why Wells trades at twice the book value that Citi does.

Highly rated CAPS All-Star huddaman thinks that while Wells Fargo carries some risk as a result of the mortgages it issues, it is one of those financial companies that can better handle the outcomes.

i feel it's very easy for a financial stock to own toxic that goes unnoticed. however, with wells fargo's great brand and distance from walls street, i think i have greater confidence here. however, they do write a lot of mortgages, so the risks exist!

All's well that ends well
At 12 times trailing earnings and just 9 times estimates, it's similarly valued to Bank of America (NYSE: BAC) and carries only a slight premium to its other rivals on a forward earnings basis, but as one of the better-run financial institutions, it could be argued it deserves an even higher premium than that. So I've gone and marked it to outperform on CAPS, but add it to your Watchlist and let me know on the Wells Fargo CAPS page or in the comments section below whether you think like Buffett that it's an investment you can take to the bank.

Even if Wells Fargo doesn't pique your interest, there's one small bank that's flying under the market's radar. It has some of the best operational numbers you'll ever see. The Motley Fool featured it in its brand-new free report: "The Stocks Only the Smartest Investors Are Buying." We invite you to download a free copy. Find out the name of the bank Warren Buffett would probably be interested in if he could still invest in small banks.