My expert friend sees 'good value' with one of the big bank stocks; Podcast episode with Enrique Abeyta; My adventures in Romania and Cyprus
1) In four of my e-mails last week, I shared insights and recent presentation slides on the banking sector from my expert friend.
He wishes to remain anonymous, but he runs a very successful fund that only invests – long and short – in bank stocks. As I've said previously, he's the smartest bank analyst I know.
Given the many headwinds he sees for the sector, my friend thinks regional-bank stocks in particular have gotten ahead of themselves. That's why he has sold his fund's stakes (at a big profit) in Zions Bancorporation (ZION), M&T Bank (MTB), and Metropolitan Bank (MCB).
That said, despite his overall bearishness toward the sector, he does own some idiosyncratic "special situation" stocks, all of which are small caps and even microcaps.
There's one exception, however: He owns Wells Fargo (WFC). I'll share his thoughts on it here and save the smaller stocks for tomorrow's e-mail...
He argues that Wells Fargo was somewhat saved by the fact that, due to past scandals, regulators had imposed an asset-cap rule, which restricts its asset growth to no more than 3% annually. As he says, the asset cap pushed the company to focus on more profitable businesses while shrinking or ridding itself of less profitable businesses.
The asset cap also proved to be a blessing because it prohibited Wells Fargo from taking all of the extraordinarily high level of deposits that flooded other banks, which, as my friend discussed last week, has led to two types of trouble today as deposits are now flowing out, plus low-interest securities and loans on the banks' balance sheets have plunged in value.
Another reason Wells Fargo didn't take in as many deposits as other big banks is because it couldn't participate in the Paycheck Protection Program ("PPP"), whose loans came with offsetting deposits.
And, to keep asset growth below 3%, the company dumped interest-bearing deposits, which reduced its costs.
Lastly, thanks to modest deposit growth, Wells Fargo didn't put lots of low-interest securities and loans on its balance sheet in 2020 and 2021.
As a result (not by choice, my friend emphasizes!), Wells Fargo has ended up in a good place, with a much better risk profile than its peers. He says this is largely due to a simpler, domestically focused balance sheet with less complex derivatives and international exposure than the other "Big Four" banks: Bank of America (BAC), JPMorgan Chase (JPM), and Citigroup (C).
And yet, Wells Fargo's stock trades at only 10 times trailing earnings and 1.3 times tangible book value – and is flat over the past decade.
My friend thinks this makes Wells Fargo a good value compared with the rest of the large banks, with a catalyst being an eventual exit from the regulatory doghouse and potential return to a more normal historical valuation and increased capital return to investors.
However, given his overall bearishness on the banking sector, he also says that he would keep the stock as a smaller position and/or offset it with a short position in the sector.
2) Tomorrow at 10 a.m. Eastern time, my old colleague Enrique Abeyta is going to be launching his new HX Podcast as part of his new firm, HX Research. You'll be able to listen to it here.
I'm honored to have been the first guest. We just recorded it, and I think it came out great – be sure to check it out!
3) On my way to Israel (where I am now), I flew to Bucharest, Romania (my 85th country) on Saturday night...
I stayed in a boutique hotel in the old town, which I explored for two hours that night, capped by dinner at midnight. The area, which, like many European capitals, had lots of ornate old buildings, was packed with both tourists and locals. Here are some pictures:
On Sunday morning, I joined two dozen other tourists for a guided tour of the old town and had a nice chat with an American couple who are both in the Navy and are currently based in the U.K., and then headed to the airport at noon for my 2 p.m. flight to Cyprus.
Why Cyprus, you might ask, when my destination was Tel Aviv?
Well, I'm a cheapskate traveler and hate being gouged – and, at the last minute, the three nonstops to Tel Aviv on Sunday were more than $500. So I instead booked a $78 Wizz Air flight to Cyprus, arriving at 4 p.m., and then a connecting flight at midnight to Tel Aviv for $241.
This routing not only saved me money but gave me eight hours to visit my 86th country!
And, as an added bonus, at Guy Spier's VALUEx conference in Switzerland last week, I had run into an old friend, Sophocles Sophocleous, who lives in Cyprus. (He also organizes an annual invitation-only investment conference there... The next one is September 17 to 20 – click here for more information.)
When I texted Sophocles to see if he was around and wanted to get together, he said he would be happy to pick me up at the airport and show me the sights and take me to dinner. What good luck!
Here are two pictures of us from my visit:
Thank you for your hospitality, Sophocles!
I'm now in Israel for the week and had a very intense, emotional day yesterday visiting the site of the Nova Music Festival and two kibbutzim where Hamas terrorists massacred/kidnapped 400 Jews.
I'll share more about what I'm seeing and learning in future e-mails... Stay tuned!
Best regards,
Whitney
P.S. I welcome your feedback – send me an e-mail by clicking here.