Stocks opened in the red this morning, with the Dow Jones Industrial Average (^DJI -0.98%) down 0.19% and the broader S&P 500 (^GSPC -0.46%) down 0.20% as of 10:10 a.m. EST.
Wells Fargo beats expectations
The largest mortgage-lender in the U.S., Wells Fargo (WFC -1.11%), reported fourth-quarter results this morning. Earnings per share came in at $0.89, which beat analyst expectations by $0.02. Revenue also came in ahead of expectations at $21.95 billion versus $21.29 billion. Nevertheless, the market is unimpressed, and the stock is underperforming the broad market this morning.
In fact, Wells Fargo's stock has lagged those of its universal-banking competitors -- Bank of America (BAC -1.07%), JPMorgan Chase and Citigroup -- during the rally in bank shares of the past three months (see graph below). However, this partially reflects the other banks' rebound from a horrific performance in 2011. Note that US Bancorp (USB -1.49%) -- a pure-play commercial bank and arguably Wells' best comparison -- has also lagged the universal banks.
Despite this, there is a stark distinction between the two groups: Wells and US Bancorp trade at a premium to their book values, while the rest trade at a discount (JPMorgan is the closest to closing that discount with a price-to-book-value ratio of 0.92).
Wells Fargo is well-positioned to profit from the refinancing boom now underway, and last quarter's results bear that out. On a longer-term basis, it stands to benefit from the recovery in the housing market. More focused and better-managed, Wells Fargo trades at a premium to its largest competitors and, importantly, is less subject to swings in its valuation. For investors seeking to capture above-average returns through buying misvalued stocks, there are better candidates than Wells. However, for long-term investors with more modest goals, it should produce acceptable returns from current prices over the full course of a credit cycle (or more than one, ideally!).
