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03-Aug-08
Valuation Completed: 8/3/08
Rating: Neutral
Comments: The stock has had a tremendous rally off crisis lows. Solid earnings and an increased dividend has driven the price higher. While management has done an excellent job, I fear that their large home equity portfolio will cause more problems. For credit loss I have used data as of June 30th and applied the following losses:
1st Mortgage 2% - 1.5B
Home Equity 12% - 9B
Credit Card 5% - 1B
Other 6% - 3.2B
This implies a lifetime loss of $14.7B versus a recognized loss of $10.2B ($2.7B charge off and $7.5B provision). The main differencel I have with management lies in the home equity business. My view is that with a dramatic drop in home prices, nearly every home equity loan that defaults will suffer massive losses as the equity supporting the loan has been eliminated. WFC's management has a more hopeful view.
The beauty of investing is that I could be too conservative and this view will cost me nothing. To paraphrase Warren Buffet, an investor has the luxury of waiting for the pitch they want before swinging. I will be conservative on loan losses and decide not to buy until the price of the stock meets my conservative view.
Fair value target is $28 with an entry price of $22.
Tagged Stocks: WFC
Posted at 15:31 in Watchlist Ideas | Permalink | Top
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