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Topic: Growth Stocks

Wells Fargo & Co. $37 – New York symbol WFC

WELLS FARGO & CO. $37 (New York symbol WFC; Conservative Growth Portfolio, Finance sector; Shares outstanding: 3.4 billion; Market cap: $125.8 billion; WSSF Rating: Above average) is the fifth-largest bank in the U.S. by assets.

Unlike the other big banks, Wells Fargo prefers small acquisitions that expand its presence in certain markets. That’s usually a cheaper way to enter new areas than building new branches. Wells Fargo also uses acquisitions to enter niche markets, such as crop insurance.

The company still relies on home mortgages and its retail banking operations for the bulk of its profits. In the fourth quarter of 2006, it earned $0.64 a share, up 12.3% from $0.57 a year earlier. Revenue grew 10.6%, to $9.4 billion from $8.5 billion.

Wells Fargo sold most of its low-rate mortgages a few months ago. It felt it would earn higher profits by re-lending that money at higher rates. However, that limits it to borrowers with poorer credit histories. Although bad loans have crept up in the past year, they represent just 0.76% of the company’s total loans.

Individual online banking accounts rose 18% in 2006, while small business accounts rose 25%. That’s good news for Wells Fargo, since electronic transactions cost far less to process than using a teller.

The stock now trades at 13.6 times its forecast 2007 profits of $2.73 a share. That’s a little higher than the other three banks, reflecting Wells Fargo’s lack of integration risk. The $1.12 dividend yields 3.0%.

Wells Fargo is a buy.

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