July 18, 2012 at 15:05 PM EDT
Why Wells Fargo Stock is a Buffett Favorite
Investing in bank stocks has not been for the fainthearted over the past several years. Many financial institutions are still dealing with the lingering effects of the 2008 financial crisis that left their reputations soiled and have kept scores of market participants at arm's length. Now, day after day, these banks are still saddled with troubles as they struggle with Eurozone exposure, uncertain global markets, mounting regulatory measures , and the newest scandal -- the Libor manipulation probe . But there is one big bank that appears to be a bright spot in this otherwise dreary sector: Wells Fargo (NYSE: WFC ). "I like Wells Fargo better than anything by far. We have been buying Wells Fargo month after month for a lot of years. Among the big banks, I think it is the best," financial wizard and Berkshire Hathaway Inc. (NYSE: BRK.A , BRK.B ) CEO Warren Buffett told Bloomberg TV in a recent interview. Click here to continue reading...
Investing in bank stocks has not been for the fainthearted over the past several years.

Wells Fargo Price History
(NYSE: WFC)

Many financial institutions are still dealing with the lingering effects of the 2008 financial crisis that left their reputations soiled and have kept scores of market participants at arm's length.

Now, day after day, these banks are still saddled with troubles as they struggle with Eurozone exposure, uncertain global markets, mounting regulatory measures , and the newest scandal -- the Libor manipulation probe.

But there is one big bank that appears to be a bright spot in this otherwise dreary sector: Wells Fargo (NYSE: WFC).

"I like Wells Fargo better than anything by far. We have been buying Wells Fargo month after month for a lot of years. Among the big banks, I think it is the best," financial wizard and Berkshire Hathaway Inc. (NYSE: BRK.A, BRK.B) CEO Warren Buffett told Bloomberg TV in a recent interview.

Buffett's infatuation with Wells Fargo goes way back. The Oracle of Omaha has been buying shares of Wells Fargo since 1990, when he purchased his first lot of around 5 million shares for some $289 million.

Since 2005, Buffett has been adding to his stash every year. Even during the height of the financial crisis in 2008, when no one wanted to touch any bank stock with a ten-foot pole, Buffett pick up another million shares of Wells Fargo stock.

The investment guru has famously held, "If a business does well, the stock eventually follows," which is no doubt what Buffett sees in Wells Fargo.

Today it is Berkshire's third- largest holding - meaning it is time for you to consider what this bank has to offer.

Wells Fargo Earnings Reveal Strength It's easy to see why Buffett is enamored with Wells Fargo stock.

Just last week, the legendary San Francisco- based bank reported solid second- quarter earnings. Profits rose 17%, and earnings beat estimates by a penny coming in at 82 cents a share.

That was a stark difference from second- quarter reports from the likes of JP Morgan Chase (NYSE: JPM), which reported a $4.4 billion loss for the quarter amid a $5.8 billion loss; Goldman Sachs (NYSE: GS), which saw its profits shrink 11% in the second quarter; and Bank of America (NYSE: BAC), which revealed interest income fell 15% along with a steep falloff in its equity business.

Wells Fargo attributed its stellar gains in the quarter to a sharp uptick in mortgage applications, which jumped 90% from the same quarter a year earlier to $208 billion. That increase was three times what JP Morgan recently reported.

Credit also goes to an increase in average deposits while the bank has minimized deposit costs. Average deposits swelled $9 billion quarter-over-quarter to $925 billion as the firm's cost of deposit fell 0.19%.

In addition, improved credit quality continues to foster improved loan delinquency rates, and in turn, earnings. The bank continues to sustain delinquency and foreclosure rates lower than its competitors.

But comparing Wells Fargo to other bank behemoths is like apples and oranges: they all operate with a different focus.

Wells Fargo is unique from its mega-rivals in that it doesn't rely on "creative" and high-risk investments for earnings. Wells Fargo makes money the old fashioned way, with earnings from steady kinds of businesses like commercial and retail lending, retail banking and asset management.

It has shied away from the kind of precarious exposure other banks have in risky global capital markets.

Wells Fargo Stock Rewards Shareholders Wells Fargo gets a pat on the back for its willingness and long- standing policy of returning cash to shareholders via buybacks and dividends.

WFC's dividend yield is 2.6%, Wells Fargo stock is currently trading with a price/earnings ratio of 11.24, lower than the average of the S&P 500, which is 15 times earnings.

The bank is a solid company with a rich history that traces its roots back to 1852. Over the years it has grown to become the fourth largest bank in the United States and the third largest U.S. retail brokerage firm.

Despite its global presence, it continues to maintain a "local" bank feel - something much more enticing than some other banks' global conglomeration vibes.

Easily recognized by its iconic trademark stagecoach pulled by galloping horses, Wells Fargo doesn't feel the need to modernize its logo. But the storied bank is not dragging its feet when it comes to progress, and always has its eye on the future as reflected in its slogan, "The Next Stage."

In an effort to keep happy its growing list of wealthy clientele, who depend on Wells Fargo's private bank for investment advice, and to appease corporate clients who rely on the bank for lending and additional services, Wells Fargo is expanding its presence in capital markets.

Wells Fargo's recent numbers show that all's well at the bank. Banking on Wells Fargo looks like a good Buffett move to ape.

Wells Fargo stock is up 23% so far this year. The one-year price target on The Street for Wells Fargo stock is $38.47, a 12.7% premium to Tuesday's closing price.

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