Here is my best investment idea for September

It has been a year that has tested investors’ resolve like never before. Panic and uncertainty associated with the 2019 coronavirus disease (COVID-19) pandemic caused stocks to plummet in the first quarter, with the S&P 500 lose more than a third of its value in less than five weeks.

But the fastest decline in the bear market in history was the fastest recovery on record. It took less than five months for the S&P 500 to go from a bearish low to new all-time highs.

Volatility has become a staple of 2020 – but that’s not necessarily a bad thing. While the wild swings in the stock market can be worrisome and overwhelming, they also open the door for long-term investors to buy great stocks at a discount. Although the stock market has recently hit new highs, value and opportunity still abound for the patient investor.

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If you’ve got the money you’re looking to put to work and time is your friend, my best investment idea for September is a branded business with roots stretching back almost 170 years. Ladies and gentlemen and investors, it’s time to buy a central bank Wells fargo (NYSE: WFC) is now.

Wells Fargo will have to overcome two key hurdles

However, before digging into the various reasons why I think now is the time to take a position in Wells Fargo, it’s important to start by understanding why the company’s stock has lost more than half of its value in 2020. , and why it has been chronically underperforming. of its peers in recent years.

The company’s recent underperformance can be blamed on COVID-19 (surprise!) And the recession that followed. Bank shares are inherently cyclical and depend on an expanding economy to drive loan and deposit growth. The coronavirus pandemic has sent the U.S. economy into its strongest quarterly contraction in decades, and that’s bad news for banks.

You see, the COVID-19 recession is hitting banks like Wells Fargo on two fronts. First, the Federal Reserve has cut its federal funds rate to historically low levels. This means less interest income for the foreseeable future. The other problem is that recessions almost always lead to an increase in delinquency on loans. So, at a time when interest income is declining, banks must set aside capital to cover an expected increase in loan and credit losses. It’s certainly a double whammy, and it led Wells Fargo to report a second quarter loss – its first quarterly loss in 12 years.

A bank manager shaking hands with clients in his office.

Image source: Getty Images.

The other big hurdle for Wells Fargo dates back to 2016, when it was discovered that the bank had opened unauthorized accounts as part of an aggressive cross-selling campaign at the branch level. In 2017, Wells Fargo announced that 3.5 million fake accounts were created. This admission ultimately led Wells Fargo to pay $ 3 billion in February 2020 to settle a civil lawsuit and resolve the prosecutions of the US Department of Justice.

In other words, we are talking about a loss of trust between Wells Fargo and consumers, as well as investors.

Here’s why now is the time to invest in Wells Fargo

This all might sound awful and has completely turned you off from investing in Wells Fargo. But it shouldn’t. If I’ve learned anything about well-capitalized central banks, investing when the outlook is darker often turns out to be the right decision.

The first thing to note about Wells Fargo is that while it has made mistakes, PR mistakes seem to be the norm for central banks. Following the financial crisis, Bank of America (NYSE: BAC) paid over $ 60 billion in settlements, much of which was related to its mortgage practices. BofA also attempted to charge customers a debit card fee in late 2011, which the bank quickly dropped a few weeks later. Although Bank of America was very unpopular in 2011, it has seen its key growth indicators increase for years. The same can be true for Wells Fargo. Regarding the scandal of the company’s fake accounts, time can really heal all wounds.

One of the most interesting differentiators for Wells Fargo, compared to its peers, has been its penchant for luring high net worth clients. Wealthy customers have always been a key growth driver for the business, as the wealthy are less inclined to change their spending habits when inevitable economic problems arise. The wealthy are also more likely to take advantage of multiple product offerings, such as a checking / savings account, one or more lines of credit, a mortgage, and wealth management services.

A messy pile of hundred dollar bills, with Ben Franklin's eyes peering between two bills.

Image source: Getty Images.

Wells Fargo also has a history of delivering above-average return on assets (ROA) compared to its peers. ROA represents the amount of a bank’s net income relative to its total assets. Most banks target an ROA greater than 1%. In Wells Fargo’s case, its ROA ranged from 1.3% to 1.4% before its scandal, and around 1.1% after, even with increased scrutiny and fees. Wells Fargo has always had a knack for delivering superior returns on its assets, and I think it may be the case again.

Investors should also take into account the caliber of the current CEO of the company, Charles Scharf. While I’m certainly not excited that Wells Fargo has had three CEOs in just over three years, Scharf seems like the right fit for the job. Before taking the reins of Wells Fargo, he was CEO of the payment processing giant Visa between 2012 and 2016. During this period, Visa’s earnings per share doubled.

Finally, consider the Wells Fargo valuation. Currently, investors can buy into one of the oldest and most successful central banks for only 64% of its book value, which is the cheapest price / book valuation since March 2009. Keep in mind that Wells Fargo remains well capitalized and looks poised for whatever the pandemic throws at it. For a bank valued between 20% and 80% above book value for much of the 2010s, and more than double its book value between 1998 and 2008, I’m inclined to believe that a return to historical standards is to come.

Patient Investors at Wells Fargo should be generously rewarded.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.

About Sally Dominguez

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