Why investors shouldn't overlook Wells Fargo

The 'littlest' big bank is on a tear in 2012.

By InvestorPlace Feb 7, 2012 2:09PM
Image: Piggy bank (© Corbis)By Dan Burrows

Is Wells Fargo (WFC) the Rodney Dangerfield of the nation's biggest banks? It sure seems like the firm gets no respect.

After all, Wells Fargo is the country's fourth-biggest bank by assets, after JPMorgan Chase (JPM), Bank of America (BAC) and Citigroup (C). Heck, it's larger than high-profile Wall Street titans Goldman Sachs (GS) and Morgan Stanley (MS). And yet too often Wells Fargo seems to fall through the cracks when it comes to consideration of financial sector stocks.

Partly that's because Wells Fargo is really more of a giant regional bank. It's not an international player. And as the nation's largest commercial lender, Wells Fargo's future is tightly tied to the state of the U.S. economy. Indeed, about 95% of it's loans are domestic.

That makes Wells Fargo a less sexy name -- and prevents the firm from cashing in on international economic growth. On the other hand -- and this is no small concern -- it also helps insulate Wells Fargo from the debt crisis in the eurozone.

Whatever the reason, it seems the stock gets too little attention as a bet on big banks. That's too bad, because Wells Fargo has been on a tear ever since the market started rallying around Thanksgiving. The stock is up more than 9% year-to-date, beating the S&P 500 by 3 percentage points. More impressive, going to back to Nov. 24 when the most recent bull run began, Wells Fargo is up almost 30%, clobbering the broader market by 15 percentage points.

Wells Fargo delivered some of the best fourth-quarter earnings among financials this season. The bank's profit jumped 20%, helped by strong deposit and lending growth. Earnings per share beat Street estimates by a penny, and although revenue slipped 4%, the top line also eclipsed analysts' average estimate.

More important, revenue grew quarter-over-quarter, which was one of the biggest overhangs on the stock, notes Guggenheim analyst Marty Mosby, who rates shares a "buy."

"WFC's revenues increased this quarter by $1 billion sequentially," Mosby wrote in a recent note to clients. "The greatest investor worry for WFC has been revenue growth, especially significant net interest margin compression."

The bank also bounced back from a disappointing third-quarter report to show accelerating loan growth, a stronger balance sheet and improved expense leverage, all the while beating "relatively high expectations," notes Todd Hagerman, an analyst at Sterne Agee, who rates shares a "buy."

"Our sense is that WFC's attractive earnings multiple will continue to gain momentum as the company's strong underlying earnings power and top tier profitability metrics once again take center stage," Hagerman wrote in a recent note to clients.

Even after the run-up, shares in Wells Fargo still appear to offer a compelling value proposition. The stock currently trades at a 28% discount to its own five-year average on a forward price-to-earnings basis, according to data from Thomson Reuters. And by trailing earnings, the stock offers a 31% discount to its own five-year average.

Meanwhile, analysts' median price target stands at $35. Add in the 1.6% yield on the dividend, and Wells Fargo has an implied upside of about 18% in the next 12 months or so.

Given its improving fundamentals, attractive valuation and a string of better-than-expected U.S. economic news, Wells Fargo looks like an undervalued -- and underappreciated -- bank stock.

And if you like under-the-radar bank stocks, you might find this play on BB&T (BBT) interesting.

As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.

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