How Far will Wells Go?

Wells Fargo reported FY numbers, equally also for the fourth quarter. The bank has been rocked by scandals last year, fake accounts opened on behalf of unwitting customers. It is a massive institution, 1 in 3 households in the US have a banking relationship with Wells Fargo. The company has been in the same headquarters since 1852, one of the few businesses to have the same name, the same headquarters for over 150 years.”


 

To market to market to buy a fat pig Yesterday was another green day for the local market, up 0.69%, 2017 has been a much better start than the carnage that was equity markets at the start of 2016. So far the JSE All Share index is up around 5% for the year or stated differently up more in these couple of trading weeks than the total return for the market for the whole of 2015 & 2016 put together. The index is only marginally above the levels of July 2014. When considering that over that time period inflation has been above the reserve banks range of 3% – 6%, in real terms holding equities has meant that you have gone backwards. Even though equity prices have gone nowhere over the last couple of years, most of the companies that you own have continued to grow. Having a long term time horizon, the current period of sideways price movement is an opportunity. You get to buy growing companies who’s share prices are going sideways and sometimes down, it is during periods like this that with regular buying you build the foundation of longterm wealth.

Retail stocks were on fire yesterday, with their index up 3.7%. Leading the charge was Woolies, up 4.8% and TFG (Foschini) up 5.3% due to a better than expected trading update from TFG. The strong run that retailers have had over the last week might come to an end today though, MR Price has released what at first glimpse looks like worse than expected trading numbers, with negative growth of 0.5%. To rub salt in the wounds, their selling price inflation was 10.8% (higher than most retailer) which means in real terms their sales went backwards by over 11%. Another stock which is having a rough time (share price wise) is Brait, sitting at a 52 week low of R77 a share. The words “Hard Brexit” being thrown around as the most likely outcome when push comes to shove during negotiations between the EU and UK has put serious pressure on the Pound. If Hard Brexit happens, the UK will essentially be left out in the EU cold and then need to rebuild their relationship with the rest of the world. We have a speech today from PM Theresa May, which is expected to give more clarity on the path ahead for the UK. Regardless of what she says, there is still a long road ahead of much negotiating which will probably take longer than the 2 years mandated by article 50. Uncertainty is bad for investing, so anything UK flavoured will have a Brexit discount for years to come.


 

Company corner

Wells Fargo reported FY numbers, equally also for the fourth quarter. The bank has been rocked by scandals last year, fake accounts opened on behalf of unwitting customers. It is a massive institution, 1 in 3 households in the US have a banking relationship with Wells Fargo. The company has been in the same headquarters since 1852, one of the few businesses to have the same name, the same headquarters for over 150 years. Of course they were supposed to be immune to scandals, this is one of Berkshire’s largest holdings, and that investment house has a pretty long and proud record.

The company has since corrected the incentives programs, where ordinary employees were subjected to very strict daily “solutions”, meeting targets. For the 5300 odd employees fired for signing customers up for fake accounts over the years, the bank was slapped with a fine of 185 million Dollars. Whilst the amount of money actually lost by the customers is small, the average amount per fake account was 1.14 Dollars per customer. It hardly made anyone anything, it lost the customers a few beans, it made the sales agents look better than they really were.

Fraud is fraud, no matter whether it is three beans or the whole beanstalk, With politicians keen to make an example of the company and broader sector, executive compensation has once again come under the spotlight. The long and the short of it all was that CEO John Stumpf fell on his sword (reluctantly), Tim Sloan assumed the role of CEO and the team said “sorry” and have tried to stick this behind them. The reputational risk is something that hangs around for probably half a generation (my best guess).

Notwithstanding all of the negative headlines, the negative news, the being hauled in front of angry (understandably) politicians, the company has managed an OK 2016. Diluted EPS clocked 3.99 Dollars, lower than the 2015 number of 4.12 Dollars. Revenues did increase three percent to 88.3 billion Dollars, net income was 21.9 billion Dollars. Size. Huge. Year end deposits topped 1.3 trillion Dollars, up 6 percent. Total loans as at the end of 2016 were 967.6 billion Dollars, up 6 percent for the year. Net interest income increased 7 percent. The numbers are OK, they really are not that bad in an environment that is just starting to see liftoff from ZIRP, Zero Interest Rate Policy.

There are two things that make this investment compelling. For starters, there is the ability to scale the technology side of the business. They have around 8400 branches, and plan to close 200 odd this year and 200 plus next year, reducing their branch infrastructure (and associated costs) by five percent immediately. What excites me more however, is that the bank is the biggest lender to both the small and medium sized businesses in the US. And small business confidence has just reached a 12 year high. The whole idea that the affordable care act may be repealed in part is a win for corporate America, if not a win for broader society. That is unfortunately the way that democracy and capitalism work, if you find yourself on the wrong end of the stick. Equally, with less of a regulatory burden (seemingly), the business may be well placed, their peers too.

It is cheap, with these earnings the business just got more expensive, an unusual event! The anxiety around the oil and gas loan portfolio has abated somewhat as the recovery in energy prices has taken hold. The dividend is likely to be hiked in the coming years as rates rise, marginally. I suspect that confidence will be restored in the brand, and it will become a hazy memory. As luck would have it, Paul reviewed the investment on Hot Stocks last evening, with the same conclusion. Watch it here, Hot Stocks talking Wells Fargo. With a yield underpin of 2.75 percent, I suspect that the stock has found a new floor. We continue to hold and see the stock higher since Trump surprised at the elections.


 

Home again, home again, jiggety-jog. The biggest news today is the Theresa May speech around 14:00 our time and then UK CPI numbers. Then tomorrow after the market closes we have Netflix numbers where we get to see how much more of the globe the company has conquered. There are very high expectations on the company so there will be share price movement. Mr Price was down 6% on the open this morning, ouch.


Sent to you by Sasha, Michael and Byron on behalf of team Vestact.

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