Stagecoach flies. Why?
If you’ve been following my blogs or picks, you probably know I’ve been a cautious bull on Wells Fargo (WFC), one of my original CAPS picks from Feb 2007 and a core part of my portfolio pretty much since I started investing in individual stocks.
Today I ended my WFC green thumb. With the news leaks that they would need $15 billion as a result of the stress test and the sharp run up in price, I decided to capture the points and accuracy – surprisingly a bank, the nation’s second largest mortgage originator, beat the S&P by 15 points over the past 2+ years.
Going into the stress test, I believed WFC either wouldn’t need to raise capital or it would be a manageable amount. The $15 billion leaked to the media nearly certainly requires a share offering and/or converting some of the government preferred to common. Part of my premise for owning Wells was that they would be able to buy back the TARP shares out of earnings and reinstate the full dividend. I can’t see that happening anytime soon if they need to squirrel away as much capital as possible.
What I don’t understand is why WFC (and BAC) rallied so strongly today on news they would need to raise capital. In BAC’s case, earlier leaks indicated they needed $10 billion; this morning’s news reports $34 billion and the stock screams up????
I have no clue what’s going on in the market with the banks. This news should have sent WFC and BAC share prices crumbling, but WFC rallies 15% and BAC 17%?? The only explanation I can think of is some major market makers were expecting bigger capital requirements to come out of the stress tests.
I also sold some more of my WFC today. I kept some just to see how far this craziness will run, but am down to about a third of what I had before earnings a week ago. A couple more days like today and Mr. Market can have my remaining shares too.
I still like the company and think the long term prospects are great, but I don’t see the basis for a 35+ % run in one week. Holding the stock as a core position with a highly probable capital raise coming and/or a possible government preferred conversion with unknown terms is more risk than I care to take. To date, a good rule of thumb has been to sell any bank that needed to raise capital – virtually all that issued stock went on to trade well below the offering price. If/when the share price pulls back and/or the capital raise picture is a little clearer, I’ll consider buying it back. If it doesn’t pull back, there are other stocks out there.
Any theories to explain strength in banks that need to raise money? Anyone buying banks in this run up? If so, which ones and can you share your reasoning?