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Turnaround Letter
Out-of-Favor Stocks with Real Value

April 16, 2021

Today’s note includes earnings updates and the podcast.


Today’s note includes earnings updates and the podcast.

Wells Fargo (WFC) reported on Wednesday. Next week has Xerox (XRX), Baker Hughes (BKR), Credit Suisse (CS), Mattel (MAT) and Biogen (BIIB) reporting earnings.

There were no ratings or price target changes this past week.

Earnings Updates
WELLS FARGO & CO. (WFC) Wells Fargo is one of the nations’ largest banks, with extensive retail and commercial banking, mortgage lending, investment banking, credit card and wealth management operations. 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 don’t look likely anymore. 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.

First quarter earnings of $1.05/share compared to a $0.01/share profit in the pandemic-stricken year-ago period. When the effects of the loan loss reserve release and a gain on sale are removed, the underlying earnings were $0.75/share. This was about 10% above the consensus estimate.

The bank recently re-organized into four segments: Consumer Banking and Lending, Commercial Banking, Corporate and Investment Banking, and Wealth and Investment Management. This structure more clearly delineates the bank’s operations into consumer, business, capital markets and investments – this should improve oversight and performance. A fifth segment, Corporate, houses its internal corporate and venture capital operations as well as businesses that are being sold.

In the quarter, lending volumes across all segments were weak. Loan balances fell 9% from a year ago and 3% from the fourth quarter, as loan demand remains sluggish and alternative lenders capture more market share. Profits on lending fell 22% from a year ago and 5% from the fourth quarter. The declines were due to the lower loan balances and to narrower net interest margins (2.05% compared to 2.58% a year ago and 2.13% in the fourth quarter). Operating expenses related to its lending remain subdued and will likely decline as the bank’s efficiency programs develop.

A major bright spot: Corporate and Investment Banking. Segment profits rose more than 4x from a year ago and 87% from the fourth quarter. Strong demand for credit products helped drive the improvement, as did lower operating expenses.

Strategically, Wells is making progress with its turnaround. It is offloading unproductive businesses including Asset Management, Corporate Trust Services, student lending and rail car leasing. Expenses appear to be restrained. It is upgrading its automation and digitization of its activities while streamlining decision-making, closing branches and tightening its risk controls – all of which should reduce its costs over time.

Its capital strength is improving, with its CET1 capital ratio increasing to 11.8% from 11.6% in the fourth quarter. Reflecting its capital strength, the bank repurchased $600 million of its shares. However, Wells won’t likely increase its dividend for another year.

Loan quality is remarkably strong and highly encouraging. Only 0.24% of its loans were charged-off, a low rate compared to its history and a shockingly low rate following the pandemic (this effect is seen across the entire industry). Non-performing loans fell from the prior quarter. The bank released $1.6 billion in reserves for loan losses in response to the improving credit outlook.

Headwinds remain. The credit outlook could still weaken as the full impact from the pandemic has been shielded by generous government support programs – once these are lifted Wells could still see a spike in loan losses. Its core lending business is clearly struggling and there are no easy solutions within the bank’s control to its market share losses or slim interest margins.

The ongoing cap on assets remains a constraint. Consumers are flooding the bank with deposits from unspent lockdown savings and from the enormous federal stimulus checks, and companies are maintaining high cash reserves. This cash requires the bank to distort its balance sheet to remain under the cap, further crimping its profits.

As Wells shares have surged to our 43 price target, we are reviewing the stock. There is the possibility for further upside as the fundamentals continue to improve, but also many moving parts and risks along with its no-longer-cheap valuation at 1.3x the $33.57/share tangible book value.

Ratings Changes

Friday, April 16, 2021 Subscribers-Only Podcast
Covering recent news and analysis for our portfolio companies and other topics relevant to value investors.

Today’s podcast is about 7.5 minutes and covers:

  • Brief updates on:
    • Signet Jewelers (SIG) – management raised their guidance, and the shares have reached our price target. The stock is now under review.
    • Toshiba (TOSYY) – KKR makes a bid, Brookfield may also bid, and the CEO resigned.

  • Elsewhere in the Market:
    • Balancing valuations and fundamentals in cyclicals and cigar butt stocks.

  • Final note:
    • Investing lesson from the weather.

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