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Turnaround Letter
Out-of-Favor Stocks with Real Value

January 13, 2023

With today’s note, we discuss the earnings report from Wells Fargo & Company (WFC) and provide updates on several recommended stocks.

Next week, none of our companies are scheduled to report earnings. The deluge starts the week of January 23, with General Electric (GE), Xerox Holdings (XRX), Nokia (NOK), Western Digital (WDC) and Dow (Dow) reporting. The following week will see reports from Vodafone (VOD), Polaris Industries (PII), M/I Homes (MHO), Meta Platforms (META) and Janus Henderson Group (JHG).

Earnings updates:

Wells Fargo & Co. (WFC) Wells Fargo is one of the nation’s largest banks. Under its previously weak leadership, the company never fully recovered from the 2009 financial crisis and its loose compliance culture led to a fake accounts scandal and other reputation-tarnishing problems. Also, like all banks, it is struggling with low interest rates and limited loan growth, although the much-feared pandemic-related loan losses no longer look likely. An additional constraint is a regulator-imposed cap on Wells Fargo’s asset size. Under new CEO Charles Scharf, the bank is aggressively restructuring its operations, cost structure and regulatory compliance.

Wells reported reasonable fourth-quarter results, but progress with its turnaround is slow, leaving investors in a disappointed mood. We remain committed to our Wells Fargo thesis as the company is making progress and the shares are overly discounted.

Revenues of $19.7 billion fell 6% from a year ago and were essentially in line with estimates. Adjusted earnings of $1.46/share rose 17% from a year ago and were 33% above the consensus estimate. Media commentators looked at reported earnings of $0.67/share and compared these to the year-ago reported earnings of $1.38/share, but both numbers were heavily influenced by unusual items. Some reports indicate that adjusted profits were $0.61/share, which would be an earnings miss. We will need to sort through the numbers over the weekend.

While we scrub out the large charge-offs from our analysis of the bank’s underlying earnings, these costs directly reduce the bank’s regulatory capital levels and thus its ability to pay dividends and repurchase shares. And, they also impact the bank’s valuation: we look closely at its share price as a multiple of tangible book value, so the lower the tangible book value the lower the share price upside potential, all else being equal. Currently, the shares trade at 119% of the $34.89/share tangible book value.

In the quarter, loans were up 8% from a year ago but flat compared to the third quarter, suggesting uninspiring growth. Deposits fell 6% from a year ago and fell 2% from the third quarter as customers removed their funds to earn higher interest rates elsewhere.

Favorably, net interest income jumped 45% from a year ago, helped by the improved interest rate environment. The net interest spread jumped to 2.66% from 2.02% a year ago. However, fee income fell 46% due to lower deposit fees, lower investment banking activity and lower asset management fees. The net effect was that revenues fell 6%.

Expenses excluding all of the charges seemed reasonable at first look. Credit costs increased, as Wells added incrementally to its loan loss reserves. Favorably, the credit quality within the loan book remains high and reserves appear more than adequate.

Wells’ capital level, at 10.6% (CET1), is down from 11.4% a year ago, mostly due to the share repurchases in the first quarter, the bank’s dividends which have absorbed much of its earnings, and the effect of higher interest rates and wider spreads on its bond portfolio. However, its capital is well-above its 9.2% regulatory minimum and the bank is confident enough to say that it will resume its share repurchases in the first quarter.

All-in, a reasonable report at our initial review. We’ll need to dig in further over the weekend.

Friday, January 13, 2023, Subscribers-Only Podcast:

Covering recent news and analysis for our portfolio companies and other topics relevant to value/contrarian investors.

Today’s podcast is about 13 minutes and covers:

  • Earnings
    • Wells Fargo & Company (WFC)
  • Comments on other recommended companies:
  • Elsewhere in the market:
    • What to make of the latest CPI report.

Market CapRecommendationSymbolRec. IssuePrice at Rec.1/12/23Current YieldRating and Price Target
Small capGannett CompanyGCIAug 20179.22 2.37 - Buy (9)
Small capDuluth HoldingsDLTHFeb 20208.68 6.40 - Buy (20)
Small capDril-QuipDRQMay 202128.28 29.35 - Buy (44)
Small capZimVieZIMVApr 202223.00 8.93 - Buy (32)
Mid capMattelMATMay 201528.43 20.24 - Buy (38)
Mid capConduentCNDTFeb 201714.96 4.66 - Buy (9)
Mid capAdient plcADNTOct 201839.77 41.47 - Buy (55)
Mid capXerox HoldingsXRXDec 202021.91 16.546.0%Buy (33)
Mid capIronwood PharmaceuticalsIRWDJan 202112.02 11.70 - Buy (19)
Mid capViatrisVTRSFeb 202117.43 11.664.1%Buy (26)
Mid capOrganon & Co.OGNJul 202130.19 31.383.6%Buy (46)
Mid capTreeHouse FoodsTHSOct 202139.43 49.23 - Buy (60)
Mid capKaman CorporationKAMNNov 202137.41 23.883.4%Buy (57)
Mid capThe Western Union Co.WUDec 202116.40 14.636.4%Buy (25)
Mid capBrookfield ReBNREJan 202261.32 35.281.6%Buy (93)
Mid capBrookfield Asset MgtBAMSpin-offna 30.97 - Unrated
Mid capPolarisPIIFeb 2022105.78 107.29 - Buy (160)
Mid capGoodyear Tire & RubberGTMar 202216.01 11.69 - Buy (24.50)
Mid capM/I HomesMHOMay 202244.28 53.11 - Buy (67)
Mid capJanus Henderson GroupJHGJun 202227.17 27.135.8%Buy (67)
Mid capESAB CorpESABJul 202245.64 52.72 - Buy (68)
Mid capSix Flags EntertainmentSIXDec 202222.60 26.06 - Buy (35)
Large capGeneral ElectricGEJul 2007304.96 78.860.4%Buy (160)
Large capNokia CorporationNOKMar 20158.02 5.021.8%Buy (12)
Large capMacy’sMJul 201633.61 22.752.8%Buy (25)
Large capToshiba CorporationTOSYYNov 201714.49 17.456.0%Buy (28)
Large capHolcim Ltd.HCMLYApr 201810.92 10.934.0%Buy (16)
Large capNewell BrandsNWLJun 201824.78 15.146.1%Buy (39)
Large capVodafone Group plcVODDec 201821.24 11.289.0%Buy (32)
Large capMolson CoorsTAPJul 201954.96 50.333.0%Buy (69)
Large capBerkshire HathawayBRK.BApr 2020183.18 318.93 - HOLD
Large capWells Fargo & CompanyWFCJun 202027.22 42.832.8%Buy (64)
Large capWestern Digital CorporationWDCOct 202038.47 37.96 - Buy (78)
Large capElanco Animal HealthELANApr 202127.85 13.22 - Buy (44)
Large capWalgreens Boots AllianceWBAAug 202146.53 36.665.2%Buy (70)
Large capVolkswagen AGVWAGYAug 202219.76 17.854.3%Buy (70)
Large capWarner Bros DiscoveryWBDSep 202213.13 13.15 - Buy (20)
Large capDowDOWOct 202243.90 58.524.8%Buy (60)
Large capCapital One FinancialCOFNov 202296.25 101.022.4%Buy (150)
Large capMeta PlatformsMETA Jan 2023118.04 136.71 - Buy (180)
Large capGE Healthcare TechnologiesGEHCSpin-offna 65.65 - SELL

Please feel free to share your ideas and suggestions for the podcast and the letter with an email to either me at or to our friendly customer support team at Due to the time and space limits we may not be able to cover every topic, but we will work to cover as much as possible or respond by email.

Bruce Kaser has more than 25 years of value investing experience in managing institutional portfolios, mutual funds and private client accounts. He has led two successful investment platform turnarounds, co-founded an investment management firm, and was principal of a $3 billion (AUM) employee-owned investment management company.