On Second Thought, Wells Fargo Is a Buy

On Tuesday, Wells Fargo (WFC) reported fourth-quarter earnings of $1 per share. That beat Wall Street's consensus by two cents per share. Strangely, the shares initially dropped after the earnings report (yep, we know how melodramatic traders can be).

Then on Wednesday, it was as if rationality and math suddenly dawned on everyone, and the nervous traders got squeezed out. Before the closing bell, WFC had rallied to a new 52-week high.

Lesson: Don't trust the market's first reaction. Actually, keep a wary eye on the second and third ones as well.

Now that I've had a chance to look at the earnings from Wells, I can say that I'm impressed. Net income for Q4 rose 10% over last year's Q4. For the entire year, Wells's net income rose 16% to $21.9 billion. This was their fifth straight record year. Last year, Wells made more money than JPMorgan (JPM) (sorry, Jamie).

I was particularly impressed with the efforts of CEO John Stumpf and his team to trim overhead. (Notice how good companies don't wait to cut costs; they're always looking for excess fat they can cut.) Quarterly revenue dropped 6% to $20.7 billion. For banks, you want to see where their "efficiency ratio" is. That's a good measure of how well they're managing their operations. For Wells, their efficiency ratio actually ticked up a bit last quarter. That's not bad, coming in the wake of lower revenue.

Wells's mortgage-originations business got shellacked last quarter, but there wasn't much they could do about that. In that sector, you're at the mercy of the Mortgage Rate Gods. On the plus side, Wells's wealth and brokerage business did very well. One big benefit for Wells is that they don't have the legal bills that many of the other big banks have.

I like Wells Fargo a lot. The bank is going for less than 11 times this year's earnings estimate. I expect another dividend increase this spring.