Thursday, March 7, 2013

Latest buy: WFC

New DOW record! Looking at the market, I see some overvalued stocks, especially in the consumer staples. Pepsi Co. has a 20 P/E, Kellogg's has a 22+ P/E. Further more, MLP's and REITs are being bid up by yield-hungry investors.

And then, there are some stocks nobody wants to touch and everyone seems to be afraid of, the financials... *Insert dramatic sound*

Today's buy:

  • 41 shares of Well Fargo & Company (WFC) @ $36.38

This purchase will add $41 to my annual dividend income.

I recently bought some WFC. I think the company is insanely undervalued. Warren Buffett pointed out in his shareholder letter a few days ago, Wells Fargo has profits understated by  10% due to certain accounting quirks.

Some rough numbers, Wells Fargo offers me:

  • A 10% earnings yield (10 P/E)
  • 8% projected EPS growth
  • Credit rating: AA- 
  • low 20% payout ratio
  • 2.75% dividend

A solid consumer staple I'd like to own someday, like Pepsi, offers me:
  • A 5% earnings yield (20 P/E)
  • 7% Projected EPS growth
  • Credit rating: A
  • Mid 50% pay out ratio
  • 2.79% dividend

So basically, WFC offers me right now a double earnings yield, a higher EPS growth, a stronger balance sheet and basically the same dividend. On top of that, WFC has more room to boost dividend, repurchase shares and strengthen their balance sheet. 

I really think there is a fear component to the valuation disconnect. People are still afraid of these scary financials, still shaking in there boots since the financial crisis. That just makes it better for me, picking up cheap shares for the long term. I just buy what is most attractively valued, and as of right now, I believe that financials are the way to go.

Thanks for reading.


  1. Nice purchase. I like your comparison with PEP; buying undervalued stocks is the way to go. Could be next year, could be in 5 years, but one day, PEP will have issues of its own and we'll be there to scoop some shares up on the cheap. BTW, looks like WFC will be increasing its dividend to $1.20 very soon.

    1. You're right, one day the market will price PEP significantly cheaper than now, we just have to be patient. The 20% dividend hike is very nice indeed!

      Take care.