For most of this year, it has been difficult to find stocks that could, in any way, be fairly described as “undervalued.” There have been moments when Tiffany, Hershey, and Diageo have offered a modest discount, which is actually more than any investor deserves given that the earnings quality of those businesses is so high. There have also been moments when Exxon, Chevron, and Royal Dutch Shell have gotten cheap, but the investor community didn’t quite “give away” those stocks at prices that I was hoping for when the price of oil briefly dipped into the $20s. And still others, like Wells Fargo and General Electric, are trading at a pretty fair price in relation to expected dividends and earnings growth over the next decade, but require investors to get passed the mental block of knowing that the returns could have been far superior if they had acted at any time in the past few years to gobble up shares.
There were always two contradictory ideas I had to carry around in my head when I first started to study investing: (1) bank stocks have a tendency to blow up every generation or two, completely wiping out shareholder equity, and (2) Wells Fargo always found a way to survive these blow-ups and deliver exceptional returns. What’s the magic that seems to make Wells Fargo the superior bank stock investment for those that want to build sizable generational wealth?
You can look at just about any long-term period and the results are staggering. Bought Wells Fargo in 1972, on the eve of a 75% banking sector crisis? You compounded at a rate of 13.5% through the present day and needed to only put $4,000 into Wells Fargo stock to own a million dollars worth of it today. Bought it in 1981? The compounding rate of Wells Fargo stock was 14.7% annually, and you would have only needed $8,500 to have a million dollars worth of it today. How about 1990? You again would have gotten a 14.7% compounding rate and would have needed to make $28,500 investment to have $1,000,000 worth of WFC stock with your name on the proverbial stock certificate.