"The financial sector got a boost after our Wells Fargo (NYSE: WFC), a buy recommendation in our model income portfolio, reported better-than-expected earnings," notes Jack Adamo.
The editor of Insiders Plus, explains, "While Wells, like virtually every other bank, is dragging its heels a bit on recognizing losses on bad mortgages, there were elements of the report that were unquestionably great."
"Whatever the “reason,” for the rise in financials, the fact remains that the group firmed. This was the relief rally I’ve been expecting for a few weeks.
""The question here is whether the strength in the financial sector will be sustained for a time, and whether it will infuse the broader market. Meanwhile, in its latest quarterly report, Wells Fargo reported:
• Revenues were up 16% year-over-year.
• Average loans were up 18% year-over-year.
• Net interest margin was 4.92%, up 23 basis points from Q1, and
• Net interest income increased 21% year-over-year.
"The fact that Wells is one of the few banks that is still well-capitalized enough to write loans was a large contributor to its increase in revenues. 'The crisis itself has created opportunities to add assets to our balance sheet at much wider spreads than two or three years ago,' said the CFO. That’s a condition that should continue for a few quarters at very least.
"Unfortunately, large increases in loan charge-offs and loss reserves more than outweighed those factors; so, EPS fell 21% year-over-year to 53¢ per share. Still, given what most banks were doing, this was a grand slam, and the stock acted accordingly.
"As a show of strength, the company also boosted its dividend by 10%, continuing a long tradition of increases. The company’s dividends have risen at a 15% compound annual rate since 1988.
"I would love to be able to assure you we’ve seen the bottom in all our bank stocks, but I can’t do that. The fact is they’ve acted pretty much in concert with their nefarious kin, who will continue to bleed red ink for at least the rest of the year, and probably longer.
"Hence, it’s possible that when the next round of disappointments in the sector comes, Wells shares may slide with the rest of the group, although not nearly as badly. But that’s part of the market madness that I can’t judge.
"What I can say is that Wells is well-positioned, despite higher than normal write-offs, to outperform its peers, and probably the market. I mentioned last week that, adjusted for inflation, I thought the market would have zero net growth over the next 10-years.
"I think WFC is one of the few places where your total return will definitely be positive, and even respectable, even in a worst-case scenario. Wells Fargo is a buy up to $32."
