Wells Fargo’s Stock Proves Defensive Due to High Investor Confidence

January 5th, 2012 by Trefis Team
-6.91%
Downside
60.60
Market
56.41
Trefis
WFC: Wells Fargo logo
WFC
Wells Fargo

The verdict that the banks’ shares saw the biggest decline over trading in 2011 is out, with two global banks – Bank of America (NYSE:BAC) and JPMorgan Chase (NYSE:JPM) – figuring in the bottom five performers among companies that constitute the Dow 30. This comes as no surprise as investors can clearly see the link between the deteriorating European debt crisis and the value of major financial institutions. But a closer look at the banks’ share prices for 2011 draws attention to Wells Fargo (NYSE:WFC). In a year that saw the KBW Bank Index (BKX) slide by nearly 25%, Wells Fargo’s shares declined by just over 11%, from $31 to $28. And the bank ousted JPMorgan to end the year as the financial institution with the largest market cap on Wall Street.

We maintain a $30 price estimate for Wells Fargo’s stock, and attribute the 10% premium over the current market price to pessimism that exists among investors in the wake of economic slowdown and worsening European debt situation.

See our complete analysis of Wells Fargo here

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Wells Fargo benefited a lot at the Wall Street because of its limited exposure outside the U.S. This limited exposure means the bank is more immune to the woes of the European economies versus many of its peers.

Wells Fargo does not indulge excessively in trading activities, and this has acted in its favor the past couple of years. Banks with sizable investment banking and trading operations took a beating in late 2011, driving investors to shun these stocks. Investors obviously factored in that Wells Fargo’s small trading operations would mean more earnings stability in the coming years.

Surprisingly its stock price held up fairly well compared to Bank of America’s and Citigroup’s even during the period when investors were extremely skeptical about the quality of the banks’ mortgage portfolios, and particularly Wells Fargo, which has the largest mortgage loan portfolio among the U.S. banks.

This indicates that Wells Fargo enjoys greater investor confidence than most other major banks. And as a bank anchored deeply in its retail banking services, the company’s expansion through its inorganic growth policy will ensure that it remains a favorite among financial sector investors looking for a stable return (see Wells Fargo’s on a Shopping Spree, Picks up Burdale from Bank of Ireland).

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