What To Do

[basl1]

After profits have been achieved in some buys like WFC is it wiser to let the profits run or take profits and reinvest in things still undervalued?

in other words, have the easy profits been made?

[Partner24]

Regarding your specific question, you have to ask yourself what is the approximate intrinsic value per share of WFC first (by the way, I don't know that answer).

 

 

[Uccmal]

That's an impossible question.  I am hoping to convert my Wells Fargo Leaps to common eventually and hold it forever.  I am trying to manage in a more tax effective manner going forward.  But we shall see.  It will only be 1000 shares on conversion.  The dividend after the reduction is 9%.  It is unlikely to go into overvalued territory any time soon!

 

Same with some of my GE Leaps, HD Leaps, Sbux Leaps (I would only do this if they install a dividend), MFC Leaps, AXP leaps, and ultimately FFH leaps. 

[basl1]

Regarding your specific question, you have to ask yourself what is the approximate intrinsic value per share of WFC first (by the way, I don't know that answer).

 

 

WHAT is the estimaed intrinsic value of wfc?

 

[basl1]

That's an impossible question.  I am hoping to convert my Wells Fargo Leaps to common eventually and hold it forever.  I am trying to manage in a more tax effective manner going forward.  But we shall see.  It will only be 1000 shares on conversion.  The dividend after the reduction is 9%.  It is unlikely to go into overvalued territory any time soon!

 

Same with some of my GE Leaps, HD Leaps, Sbux Leaps (I would only do this if they install a dividend), MFC Leaps, AXP leaps, and ultimately FFH leaps. 

 

the question is not impossible. The answer, however is difficult and depends on intrinsic values. Surely, some on this list have an understanding of the right answer

[Uccmal]

the question is not impossible. The answer, however is difficult and depends on intrinsic values. Surely, some on this list have an understanding of the right answer

 

That's a pretty obnoxious comment. 

 

By impossible I meant that it is impossible to answer for you what is the better course of action.  I quite clearly outlined my course of action. 

 

 

[basl1]

the comment was not meant to be obnoxious, but to provoke deep thought.

 

Surely, that is not meant to be threatening. I know what Buffett says about caculating intrinsic value - I just know not how to put it into practice.

 

He says you take the sum of all earnings and bring them back to today. The calculation is made for Coca cola in Mary Buffet's book. Can someone attempt to apply it here?

 

 

[arbitragr]

 

He says you take the sum of all earnings and bring them back to today. The calculation is made for Coca cola in Mary Buffet's book. Can someone attempt to apply it here?

 

 

 

:D

Dude ... not for WFC. It's a bank ...

 

lol

[oldye]

If you can do it with an insurance company you can do it with a bank...you need to be comfortable enough  with a particular issue to normalize return on equity for say 10 years then bring it back to today by discounting at your cost of capital.  Put another way, because you are forecasting far into the future you need to be comfortable with estimating the rate of return management can achieve on future earnings. 

 

Lets use Wells as an example.  If you assume 12% growth for wells, shareholder equity will be at 400 billion in 10 years.  You can guess at where the stock will trade in 10 years, assuming moat continues to grow you'll have probably 2-2.5x equity so assume a market cap of 800-1000 billion.  Of course thats if they manage to grow equity at 12% a year.  Easy enough to do the math in your head!  Even if they have to dilute shareholders by 50% over the next 10 years, you'll still have a 5-6 bagger in 10 years from todays price. 

 

Hope Fairfax's 13F for Q1 comes out before the meeting because I can't wait to see what they did last quarter. 

 

 

 

 

 

[arbitragr]

Well then, you are obviously a lot better than me.

Because I can't even fathom what their potential loan loss provisions and net charge-offs are going to come out of their interest earning assets. Nor can management. Nor can I understand what some of their securitized assets are.

And without that, I have no idea what their pre-provision earnings are going to be, let alone net earnings and thus, the future cash flows ... that will eventually be capitalized.

 

Here's the dilemma we face. Let's take the BAC / ML merger ... BAC acquires ML ... and then a month later ... BANG! ... they reveal that ML has a 15B 4Q loss in 2008, owing predominantly to writedowns on its mortgage assets. Now maybe it's just me, but predicting earnings within that framework is hella hard ...

 

Good luck. Never seen a DCF on financials before. Industry standard is the BS.

But what do I know.

:)

[Uccmal]

Sorry Basl, Misunderstood.

 

Anyway, I dont see the use of DCF in any case other than Coca Cola.  The numbers Oldye presents are obviously untenable.  I have some thoughts I will post latter.

[basl1]

Oldye is on the mark. You see, WFC is hard wired as Buffett says, not to make bad purchases. They are hard wired not to make bad loans. There mote keeps growing and thewy'll keep growing. It does not matter if they are a bank. In this environment, winners will be wwinners, losers - well, losers.

 

Let's look at rate of growth. How is 12% obtained. Is this the rate of growth over last several years? is it reasonable tothink it'll continue?

 

Lets forward it to 10 years out. What will compasny be worth. What will cost per share be. What would a reasonable cost be share be today?

 

Let's look at other berkshire purchases and do the same.

 

oldye - your thoughts, please. Prasad - your thoughts, please. help me be a better investor

[basl1]

most humbly sorry, thaT WAS pARSAD. MY LATENT DYSLEXIC KEYBOARD STRUCK AGAIN :)

[benhacker]

Prasad - your thoughts, please. help me be a better investor

 

I'm not him, but I think overconfidence and cheerleading in this sector can be particularly damaging to your wealth.  Businesses don't grow magically to the sky. I think you need to really understand Wells' profit drivers and where they come from... and you also (more importantly?), as Arbitragr is refering to, need to understand the balance sheet and what it looks like under various scenarios.

 

I'm massively long this beast, but banks should inherently make all of us nervous as equity investors.

 

Piggy backing on Warren's comments or ideas may work but make sure you size your bet accordingly, he has the means to turn highly dilutive situations for us into boons for him, so his perspective is a little different.

 

Just my 2cents.

 

Ben

[basl1]

Ben,

Humbly - I'll follow Buffett's lead anyday, over anyone's. YOU CAN BE PESSIMISTIC IF YOU LIKE. bUT THE ODD'S FAVOR wfc immensely.

 

A good company, no matter what industry, will provide growth and profits. Banks are no different. if a company has a big moat - and a reasonable price - and Warreen's endorsing it, I'll buy

 

[SharperDingaan]

 

You might want to look a little deeper at WFC's press release,

& ask some hard questions.

 

- Why did this bank feel it neccessary to 'pre-release' earnings, by roughly 2 weeks?

- In Q4 they had 6.1B of combined write-down, but in Q1 the number is perhaps 1/3 that (3.3B less pension provisions)?- & at a time when main street (the borrower) was clearly worsening. Is this because of massive provision 'releases' (possible only because they didn't provision at all) re the new MTM rules, or is it from genuine new business?

- Lot of disclosure on gross new lending - but silence on the net new lending? So how do you know that this isn't simply old loans rolling over with margin shrinkage ie: a very high margin 'underwater' loan being refinanced as low/medium margin 'performing' loan.

- WFC has a record profit, yet it still feels that it cannot afford to give back the TARP funds? Which suggests that this Q1 profit is primarily 'paper' (ie: MTM revaluation) & not operational (ie: it actually generated cash)

- Why does WFC come by its reputation for under provisioning, over promising and under delivering.

 

Part of a CEO's job is to talk up his coys share price. A 'pre-release' is often a trial balloon; if no-one calls you on it you'll report the numbers you've stated, if you are called you'll report lower numbers. There is nothing illegal as you haven't reported actual financials, only an informative press release.

 

If you believe that this is the start of a Q1 trend amongst all the major banks it makes sense to continue to hold - as each banks release will hype the price expectation for the entire sector. However, the wise man would also have some out of money puts on the more volatile banks in the sector.

 

If there is gaming going on, you'll profit both ways 

 

SD

 

 

 

 

 

[benhacker]

Basl1,

 

YOU CAN BE PESSIMISTIC IF YOU LIKE.

 

Thanks Basl1... feel free to shout in all caps, but I've been THE biggest bull on this board for WFC over the last while, so your comment doesn't make sense.

 

I'm trying to save you future loss and pain by offering a suggestion to be skeptical and cautious.  Read Sharper's post, understand Well's financials, and ask yourself does their announcement all jive?

 

Feel free to not respond, following Buffett is not a bad idea, but don't get overconfident...

 

Ben

[basl1]

This board is for discussion, hence my comments. I await comments of those who are heavily invested in WFC, and the wisdom of those following Buffets principles

[Guest Broxburnboy]

I have to agree with SharperD.. there is an element of spin in this quarter's results. WFC is probably the safest

of the megabanks, but it still has 2Trillion dollars worth of derivatives on its books and is vulnerable to further delevering.

WEB made his investment with eyes open.. his goal was to acquire a world class brand at a bargain price. He was

not buying for the thne current valuation, but for the future.

For all we individual investors know, he was simply taking a preliminary stake. If the financials deteriorate, or more capital is needed

WEB is sitting in the catbird seat, with an exisitng position and a wad of cash to recapitalize the company, backed by government

at the expense of the current shareholders.

It seems to me that if you want to play with this name, you should do it through BRK

[benhacker]

Brox,

 

...but it still has 2Trillion dollars worth of derivatives...

 

Or $40B netted.  But notional amounts are so much more scary sounding.  I think stating that Wells is levered to the economy and is subject to deleveraging is a true enough statement, and certainly highlights their core risk.  What saying "$2T" in derivatives adds to the conversation, I don't understand.

 

It's like when everyone one pissing about Lehman and Wamu CDS exposure and when all was said and done, cash trading hands was <5% of notional contract exposure but non of the "OMG the sky is falling, JPM has $70T in notional blah blah blah" people came back and brought that up.

 

I think the level of obfuscation on this board and the resistance to this particular idea is particularly surprising.  If you think Wells is going to go down you can hedge out the systemic risk in about 100 ways... It's relative value seems compelling.  Lots of ideas here are thought stupid by some, but few if I can recall are actively resisted to such an extent.

 

I must just not get it.  I clearly understand there are risks, but I just don't get the pushback.  Is there a compelling bear case here?  Who is short if anyone?

 

Ben

[oldye]

The old Wells was certainly capable of growing equity at 12% after dividends, I haven't the faintest clue what this new hybrid Wells can achieve, probably shouldn't expect more than 8% annual growth in BV for at least 2-3 years plus remember that you are taking on some serious earthquake risk.  California is a powder keg right now, a few little tremors can be enough to normalize real estate prices with the rest of the nation. 

 

 

  They hold just a smidge under 10% of the nations deposits, what happens if margins aren't so frothy in 2-3 years and there is no room to expand the depositors base?

[SharperDingaan]

 

Ben, Basl1

 

Bear in mind that you're looking at different investment horizons.

- Long term WFC will very likely do quite well, & WEB's purchase is a recognition of that. Value investors shouldn't be particulary interested in todays price, unless they are planning to add to their position. As Brox points out, we don't know if WEB has bought all that he is planning to.

- Short term, WFC's actions are looking suspicious enough to consider hedging. Depending on your view the hedge could be a short put, outright sale & repurchase, or a long put.

 

The 'bear case' essentially rests on the P(x) that should be attached to the 'good' outcome, & the potential incremental price difference that it will generate versus Friday's close ie: if there is a stongly +ve EMV there is a reason to hold.

- There is little confidence in both the P(x) & the incremental value (rests on the press releases credibility), and the likely outcome would seem to be either a strong rise or a steep drop from Fridays close. Hence hedging would seem appropriate.

 

No pushback, resistance, etc. Just different considerations.

 

Cheers

 

SD

 

 

 

[basl1]

again, I ask the relevant - what is a share of WFC worth -it's nv. At $8.00 it would appear a screaming bargain. Buffett was buying at 24-$35 (gurufocus) I believe he is under limitations as to how much he can own as is the case of AXP.

 

[SharperDingaan]

 

NPV is a long term valuation, but the price of a WFC share is what someone else is willing to pay for it today. As at close of trading 04/09, USD 19.61, following a USD 4.72 (31%) rise attributed to a press release. The USD 8.00 price was just over a month ago.

 

At close of trading 04/08 WFC went for USD 14.72 - up 70%+ in a month; & most would suggest because of improving business conditions. If thursdays close holds (& perhaps even rises) the short term price gain will be well > 100%. The point being made is that to many folks, the magnitude of that short-term price gain is unsustainable.

 

Agreed that long term WFC is a buy, but short term - you might well be able to buy it for 30% less 

 

 

 

[Smazz]

A wise man once said:

 

"tell me where I will die and I will surely not go there"

 

in other words, if you can tell me the future, I can answer your question.