PM Capital’s founder Paul Moore recently celebrated 30 years in the business. As a global investor, he shares with us one of his favourite stocks – a company he has held in his portfolio for 27 years.
How long have you held the stock?
The first time I invested in Wells Fargo was back in 1988, at the peak of the California commercial banking crisis.
What do you like about it?
What initially attracted us to the stock was the quality of its deposit franchise, which afforded it the lowest cost structure/highest net interest margins amongst the regional banks in North America. It was also well renowned for its commercial loan underwriting capabilities. It was a classic but the best business in an industry at the peak of a severe cyclical downturn.
The underlying characteristics of the bank have not changed and it is now recognised as the premium domestic bank in the country.
How is it different to the Australian banks?
On the funding side, its deposits are predominantly non-interest demand deposits and the lowest cost source of funding; latest quarter 0.08%. In contrast, Australian banks rely heavily on higher cost term deposits.
On the loan side, Wells Fargo has greater diversity, especially in relation to commercial and industrial loans. Australian banks are dominated by housing loans creating both single event concentration risk and greater balance sheet leverage.
US banks have been hit by market sentiment recently. How has this impacted Wells Fargo?
Short-term, price action is similar amongst all large domestic banks. Wells Fargo is afforded a higher valuation due to its perceived higher quality and lower risk.
What is your target price on the stock?
In a low interest rate environment, a price earnings ratio of 12.5 times trailing earnings is very conservative. If investors became confident of the economic growth outlook, I suspect a ratio of 15 would be afforded.
At what point would you sell it?
We would look to sell the stock if it approached the upper end of our valuation range of 15 times trailing earnings.
How much has it added (subtracted) to your overall portfolio over the last 12 months?
After doubling in price from 2011 to 2015, Wells Fargo has pulled back approximately 10% over the last 12 months and is selling on approximately 11.5 times current earnings.
With a 3% dividend yield, single digit earnings growth and a move into the 12.5 to 15 price earnings multiple range that we would expect, our hurdle rate of 10% per annum returns can be met and thus we continue to own the stock.
Wells Fargo (WFC)
Source: Yahoo!7 Finance, 24 March 2016
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