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Berkshire Hathaway Inc. Message Board

  • libertarians_2000 libertarians_2000 Oct 24, 2010 10:44 PM Flag

    WFC thoughts. Please demolish.

    I doubled my WFC position last week, and it was sizeable (13%) to start with, so if
    anyone's interested, here are the things I see possibly going wrong. If someone
    can point out what I'm missing, I would be grateful. I'm OK losing
    money on this if I've at least weighed the risks. I'll be ticked off if
    something out of the blue hits that should have been considered.

    Offsetting the low price are:

    1) Wachovia integration risk. Systems failures, etc.
    2) Regulation risk. ( Looking at WFC's sources of income, I see about $3B- or 7%
    - of revenue at risk. That's on top of the $380MM hit they took just from Reg E,
    the overdraft reg's, in the last quarter. )
    3) WFC has a lot of bonds (~170B) over 10 years in duration. They will get hit
    if interest rates rise.
    4) Conversely, a flattening yield curve will hurt them. They can't drive their
    cost of money much lower, but if they can only get say 40% of what they are
    getting now on their money, their profit is gone. Deflation is their biggest
    enemy.
    5) Risk of loan demand staying flat.

    I have zero concerns about the losses on the current book, or the latest
    repurchase / foreclosure stuff.

    All of these risks are manageable, I think, except if # 4 gets out of control.

    There are a lot of positives to offset these risks IMO. They grew deposits 9%
    annualized this quarter vs flat for competitors. That is their lifeblood. They
    have lots of cross-sell opportunities in the Wachovia book. And mucho costs go
    away at the end of 2011, when the integration is done ( and losses should be
    back to, or approaching, 1%of loans).

    I believe in Buffett's pre tax, pre-provision theory. Essentially it requires
    faith in normal loan loss ratios, and in WFC's ability to make money off their
    customers.

    So here is what WFC has sold for, relative to those PPTI numbers. I had to
    extrapolate them, but they should be close. ( It irritates me that WFC rings the
    bell on PPTI growth when it's good, but ignores it when it drops - like lately.
    But that's another story / rant.)

    YE price / share.....PPTI/share....P/PPTI

    2000 $28.....2.26......12.5X
    2001 $22.....$2.00......11X
    2002 $22.....$3.00......7.5X
    2003 $29.....$3.53.......8.3X
    2004 $31.....$4.11......7.5X
    2005 $31.....$4.50.......6.9X
    2006 $35.....$4.85.......7.2X
    2007 $30.....$4.70........6.4X
    ( Didn't bother with 08/09)
    Today: $26.....$6.40.......4.0X

    I think it's worth mentioning, Buffett bought tons of WFC at $32 in 06/07. If
    you believe the franchise is intact - and I believe it's improved- getting WFC
    at 20-25% off Buffett's price has to be considered.

    I just think the reward outweighs the risk. A return to 7X PPTI is $45. Also, if
    this plays out as I expect, WFC will be paying $1.25+ dividends soon enough.
    That's over 5% on today's price.

    I'd be interested in downside risks I'm missing....I should probably throw in
    another big housing price drop risk as well.

    P.S. Stumpf talked about a 35%-40% dividend payout returning. That would be
    $1.25+ or 5% on current prices.

    SortNewest  |  Oldest  |  Most Replied Expand all replies
    • I'm sure that's news to WFC's regulator if they're reporting fantasy.

      But you're willing to allow yourself to accept the ZeroHedge tabloid trash? You can't be that gullible. If you are the market is going to eat you alive.

      -TF

    • lord of the rings has more fantasy in it...but you know that already.

      bokor would be proud of you for reading it though!

    • Slide #19, upper right hand corner (national home equity core delinquency trend):

      https://www.wellsfargo.com/downloads/pdf/press/3Q10_Quarterly_Supplement.pdf

      -TF

    • Oh...and by the way, noninterest income will be over $40 billion per year so in 3 years that means WFC will have earned over $120 billion.

      -TF

    • Theoretical charts now? LOL.

      Do you have a theoretical chart if 100% of all loans go bad?

      How about a theoretical chart of what happens to the earth if the sun burns out?

      How about a theoretical chart of Coca-Cola if everyone who has ever drank it could sue stating it caused "obesity", and the payout was $1 million per person.

      This is fun!

      -TF

    • WFC is my 3rd largest, but MTB is up there also. But 26% in any stock or sector is stupid. If that stock was plunging like it did in 2009 and with 26% of your life savings in it could you hang on and sleep at night? No way. I remember guys who were heavy in Financials who couldn't hang on. Diversify diversify diversify, both in stocks and sectors no matter how much you like something.

      • 1 Reply to Bon_Ten
      • <could you hang on and sleep at night? <

        I slept like a lamb during the '09 crash and had huge concentrations then. BRK was cut in half and it didn't bother me.

        Yeah, if you own financials like Fannie Mae, it's different.

        The key is, is the stock falling for reasons you know are nonsense? If so, I'm able to weather it.

        My concern is that WFC falls for reasons I haven't accounted for - that's when you're subject to making emotional and bad decisions.

        That's why I'm trying to figure out if I'm missing anything.

        The only issue that can cause permanent damage to the franchise is deflation, IMO.

        P.S. I've done the downside math, and a 50% haircut on 26% of the portoflio is 13%. That's really not that bad. To me.

    • interestingly, with the exception of point 2, you failed to quantify any of your risks.

      also using RELATIVE bubble earnings and valuations is a sure fire recipe for a disaster investment in the new banking order going forward.

      buffett also bought irish banks at the same time he was loading up on wfc.

      due to regulatory forbearance (noted below), the numbers at wfc and its tbtf cousins are no good. i.e., garbage in garbage out.

      making an investment largely based on buffett's shameless pumping and what wfc management says is wishful and reckless at best.

      completely dismissing wfc's exposure for foreclosure gate and putbacks is ridiculously naive and dishonest.

      the banks are toxic and outside the circle of competence of most imho.

      http://www.washingtonpost.com/wp-dyn/content/article/2009/04/02/AR2009040201264.html?wprss=rss_business

      calc risk...Some advocates and real estate agents also point to an April 2009 regulatory change in an obscure federal accounting law. The change, in effect, allowed banks to foreclose on a home without having to write down a loss until that home was sold. By contrast, if a bank agrees to a short sale, it must mark the loss immediately.

      • 1 Reply to tiempolargo
      • interestingly, with the exception of point 2, you failed to quantify any of your risks.

        < My post was long enough. I've quantified them, and they are not big enough to impair the
        earnings significantly ( except #4). All you have to do is look at their sources of income in their 10-Q's to get context.>

        also using RELATIVE bubble earnings and valuations is a sure fire recipe for a disaster investment in the new banking order going forward.

        <I wouldn't use 'bubble' but you may have a point. WFC averaged 15X earnings from 02-07. That's pretty high for a bank, although their growth probably justified it. <

        buffett also bought irish banks at the same time he was loading up on wfc.

        < he bought the Irish banks during the crisis, and WFC beforehand.>

        making an investment largely based on buffett's shameless pumping and what wfc management says is wishful and reckless at best.

        < WFC' track record drives my decision far more than than anyone's words.<

        completely dismissing wfc's exposure for foreclosure gate and putbacks is ridiculously naive and dishonest.

        < I wish we could put an over / under bet on the $$ impact it has. I'm sure I'd win. Read the CC transcript and check out the numbers on WFC's website. <

    • so WFC is now 26% of your portfolio? Wow. Whatever you do, don't move to Vegas.

    • Not sure what you mean by the following: "but if they can only get say 40% of what they are
      getting now on their money, their profit is gone"

      What profit is gone? Don't understand.

    • i am in wfc big at 23 and change. I want to remind you Buffett bought billions at 32 before the dilution. I still feel it is extremely cheap.

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