By Vinh Nguyen
The market moved more than 200 points in both directions, creating a high level of volatility and causing investors to lose sleep at night. For those who are holding Wells Fargo & Co (NYSE:WFC), the last week has been highly nerve-racking. The company was fined $185 million for illegally opened millions in checking, credit cards and other type of accounts without customers’ consent. This resulted in eager employees who wanted to meet WFC’s new sales target and collect bonuses.
With the uncertainty of the Fed policy on interest rates, selling volume skyrocketed over the last week, and investors are now left panicking. The bad news is that this can create a significant downgrade in the eyes of the public, a public who has always tried to find a case against the banking industry.
The market does not take cues from anyone, where stocks sell first and questions are asked later. Value investors should not listen to the market for advice but should act upon their analyses and use intimidating headlines to their advantage to buy the stock at a more attractive price and higher dividend.
A $185 million fine vs. Net profit of $22.9 billion
A $185 million fine is just a drop in the bucket for WFC considering that the giant bank generated $86 billion in revenue and nearly $23 billion in net profit. Sales increased 2% and earnings per share increased 1% last year, a reflection of effective cost controls, a quality loan portfolio and a steady increase in loans and deposit. In the end, investors will have to choose between public opinion, which is often based on the emotions of investors, and the strong underlying business model, its assets, and its dominance in the market. It seems quite obvious where the right decision lies.
Does the reputational damage worth nearly $20 billion cause a decrease in value?
The stock dropped almost 10% in the last 2 weeks, which translates to a nearly $20 billion decrease in valuation, all the consequence of a fine of $185 million, $2.5 million in fraudulent fees. The amount exceeds the entire book value of WFC’s energy portfolio, which worth about $18 billion, and this fine is not even close to what other banks got faced when they were in trouble.
In 2012, J.P Morgan paid the London Whale Trading scandal $6 billion in trading loss and $1 billion in fines, a ten-times larger fine from regulators compared to WFC’s, taking a hit in the valuation. The stock lost 30% in value, yet still recovered the same year.
Goldman Sachs sold $11 billion in synthetic CDOs and then shorted those CDOs. The bank paid $550 million, nearly twice the size of WFC’s, and the stock plummeted 25% in 2010, although it recovered the same year.
Rising rates could be strong catalysts for WFC, as higher rates will widen the net interest margin the bank can earn, and create a spread between interest paid on deposits compared to what is collected on a loan portfolio.
Headlines in financial news are fun to read but they are somewhat immaterial to the investors’ goal. Investors care so much about the money in others people’s pockets when they should go out and look for bargains, which are fall-from-grace companies, temporary unpopular, and being sold at a discount. It would be fun to watch the news in the future to see how the market calms itself. It may sound cliché but Warren Buffett’s quote is perfect in this context: “We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.”