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What Does Warren Buffett Like About Wells Fargo?

Warren Buffet is well known for his contrarian stances. But the Sage of Omaha's recent comments about Wells Fargo are enough to make even the most ardent value investors pause for a second.

"If I had to put all of my net worth into stock, that would be the stock," he said of the bank at Berkshire Hathaway's annual general meeting of shareholders this weekend. Motley Fool's Morgan Housel sums up most investors' reactions to the statement pretty well:

Forget the biggest bomb from this year's shareholder meeting; I think Buffett dropped the biggest bomb ever this weekend when he said he would have been comfortable putting his entire net worth into Wells Fargo when it fell below $9 a share in early March. I nearly threw up at first.
In fact, if Buffett had said he liked Morgan Stanley, Goldman Sachs or even Citigroup it's fair to say that investors would have stomached the comment more smoothly. But Wells Fargo? That's the firm which is faring least well of the big banks in the government stress tests. Monday, Wells announced it is laying off 548 employees in Charlotte, while the government is expected to tell the firm it will need to raise more cash to meet capital adequacy requirements in the tests.

On top of that, Wells Fargo is more expensive now than most other banks. At 30 times earnings, Wells trades nearly triple the number of times that Bank of America does against its earnings, and gets nearly twice what Morgan Stanley can fetch for its own. It's up there with Goldman Sachs!

"I think I know their [Wells Fargo's] future, frankly, better than somebody that comes in to take a look," said Buffett this weekend, referring to the officials conducting the stress tests. So what does he know that we don't?

Mainly, it's that the bank has some of the lowest cost of capital levels in the industry. In other words, Wells Fargo has to spend or invest less for every dollar that it makes. In a market where credit rarely comes at a cheap price, that's a compelling reason to like the bank.

On closer inspection however, there are also some interesting parallels between Wells Fargo and Goldman Sachs -- another Buffett investment. They have the same price to earnings ratio (around 30). They're both the Kings (believe it or not) in the spheres of commercial and investment banking, respectively. And they both "stick to the knitting." That is, Goldman Sachs doesn't try to get involved in consumer finance -- unlike, for example, Morgan Stanley -- and Wells Fargo by and large steers clear of the type of investment banking activities that the latter loves.

Now that kind of simple, core business focus sounds just like a Berkshire company.

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