This Stock Has Gained 150% Since I Bought It – but It Could Still Be a Bargain

Wells Fargo (WFC 0.89%) was one of the best opportunistic investments I’ve ever made. I bought the stock in mid-2020 when the COVID-19 lockdowns were still going on. At the time, there was tremendous economic uncertainty, and as the most consumer-focused of the big banks, Wells Fargo became especially volatile. Plus, at this point, the bank’s “fake accounts” and other scandals were still fresh in investors’ minds.

To be sure, I expected quite a bit of volatility when I bought shares of Wells Fargo. But with shares trading at about 60% of their book value despite strong asset quality, it seemed worth the risk.

About four years later, I’m glad I took that chance. Wells Fargo is up by about 150% compared to the price I paid. Including dividends, I’m sitting on a total return of more than 170%.

However, even though it has been one of my top-performing stock investments of the past few years, I’m not planning to sell a single share. In fact, Wells Fargo could still be quite a bargain for patient long-term investors.

Strong business results

To be fair, quite a bit of Wells Fargo’s tremendous performance occurred from late 2020 through the end of 2021. If you don’t remember, the stock market started to rebound sharply when the initial data showed Pfizer‘s (NYSE: PFE) COVID-19 vaccine was effective, and the surge in stock market interest added fuel to the fire.

Having said that, there’s a lot to like about how the business has performed since that time. For one thing, we didn’t see the massive wave of loan defaults many had been expecting at the onset of the pandemic. Despite increased competition from higher-yielding online banks, Wells Fargo’s deposit base has held up nicely. Plus, the company has done a great job of growing some of its sources of noninterest income.

For example, investment advisory fee revenue grew 8% year-over-year in the most recent quarter, and while investment banking isn’t a large part of Wells Fargo, its investment banking revenue nearly doubled in the first quarter compared with the same quarter a year ago.

Wells Fargo has also continued to buy back shares rather aggressively, which has certainly helped drive returns. Since I bought the stock, the outstanding share count has fallen by more than 15%.

Could Wells Fargo be a big winner from here?

There are a few big reasons why I think Wells Fargo could still be an excellent bank stock to buy right now.

For one thing, as the most consumer-focused bank (it is the only one of the “big four” without a large investment banking operation), Wells Fargo could be the best-positioned to benefit as interest rates normalize. Without getting too deep into it, the basic idea is that deposit costs have risen faster than the yields banks are getting from loans, and this has led to margin compression. Wells Fargo’s net interest margin has fallen from 3.20% to 2.81% over the past four quarters, but this could reverse course if benchmark interest rates start to fall.

Also, charge-offs have increased industrywide, and there are fears that economic weakness could cause this trend to continue. Wells Fargo’s NCO (net charge-off) ratio has increased from 0.26% to 0.50% over the past year. But if this stabilizes, it could be a positive catalyst for the stock.

Last but certainly not least, Wells Fargo is still growth restricted. In response to its scandals, the Federal Reserve placed an asset cap on the bank several years ago, which effectively prevented the bank from growing. It is still in effect, but there’s a significant probability that it will be removed within the next year or two, and this would likely be a major positive catalyst.

To sum it up, there are several reasons to be optimistic about Wells Fargo going forward. With the stock still trading for a historically low price-to-book valuation and for less than 12 times forward earnings estimates, I’m planning to hold my Wells Fargo shares for the long haul.