Wells Fargo Great Investment For Troubled Times

As almost all stocks have fallen hard over the last week due to coronavirus (COVID-19) fears and likely people just wanting to take money off the table before everyone else does, we need to look at what companies are doing to thrive during such a time. I've seen analysts and suggestions in comments sections ranging from buy suggestions for stocks that sell disposable face masks to gaming stocks (since people will be staying home more). Quite frankly, I see all this as speculative nonsense that would move the needle very little at most companies for the one-time event that it is.

Even Gilead (NASDAQ:GILD), which I think has a promising anti-viral, remdesivir, they're investigating in the treatment of COVID-19, would likely only see a one-time benefit. Even if the coronavirus continues to spread and even picks up steam and even if remdesivir eventually cures it, it's tough to imagine GILD seeing more than a few billion dollars in profit from this. The market cap of GILD has already gone up ~$15B from its January lows, as of writing this. With how much volatility there has been, this could change by the time the article publishes.

We could speculate all day about the number of people that will eventually be infected, if remdesivir will even be helpful as a treatment, and how much governments/people would be willing to pay Gilead per treatment without considering it extortion. I have a tough time believing it will amount to more than the amount its market cap has already gone up over the last several weeks, but I like GILD as a company, so I won't argue too much with that one.

So why look for stocks to buy when everyone else is selling? I don't see coronavirus as something that will create a multi-year recession for all industries. It could certainly do that to certain industries, say Oil & Gas, Transportation/Travel, and perhaps some Retail/Manufacturing with global supply chains. Also I thought markets were a little overbought in the last year, so I've been stockpiling cash (~30% of my portfolio). I'm not going to spend it all at once; if this market correction becomes a real recession, I want to have funds to continue to buy stocks that drop further. However, I am ready to start applying some of those funds. Wells Fargo & Company (WFC) is my first buy from the correction over the last week.

Part of the reason I like Wells Fargo as my first buy is because I see it as a stock doing well in any scenario that coronavirus likely presents. What are the main scenarios I see?

1) Quick Market Correction - The virus continues spreading, but due to awareness about it and media coverage, the spread/deadliness is contained and markets climb back to previous highs in a few weeks/months. Some industries are adversely affected for a portion of 2020, but none are affected long-term.

2) Targeted Longer Market Correction - Coronavirus continues spreading and adversely affects some industries more than others. Oil & Gas, Travel, and Retail (especially companies with supply chains in China) industries are hit the hardest. The recovery is slower for these industries but the rest of market participants return to near previous highs by the end of the year or perhaps next year after market confidence has returned.

3) True Prolonged Recession - The virus is as bad or worse than the hype. It affects many more industries than expected and for longer amounts of time. Capital markets close up, employment numbers are hurt, and bankruptcies happen in greater frequency.

What Happens to WFC in Each Scenario?

In any of these scenarios, I see WFC thriving at the current prices. In scenario 1, I could sell the shares after they bounce back a quick 10-20% with the rest of the market or continue to hold if I want. I don't really see it outperforming other stocks I could pick in this case, but it still represents a fantastic return if this scenario happens. Basically in this scenario, you win with most stock picks currently, and it's just about putting some money in the game at all.

In scenario 2, general market sentiment could send WFC prices lower, but I don't see it affecting its long-term business much. Perhaps short-term interest rates continue to fall/stay low for a while, but they bounce back after several months/toward the end of the year. This is both the most likely scenario in my eyes and the best for WFC. It would be able to spend the remainder of its gigantic 2019 buyback plan on shares at a depressed price over the next few months. I also think it would be likely it has the dividend and another large (though likely smaller than 2019) buyback approved for 2020. The company could have to cut some costs and jobs if enough parts of the economy slow down, but in this scenario, it would be a manageable amount.

I realize that lower rates hurt banks. In scenario 2 though, with interest rates only staying at such depressed levels for a few months to the rest of the year, new loans made by WFC could be hurt, but it still would make profit. And where most industries will see headwinds to true growth, since WFC is in the business of buying back stock as its main avenue for growth, a lower stock price will actually help it.

In scenario 3, WFC does see its business affected. The company likely would have to cut back on the buyback amount for next year significantly/altogether, cut costs/jobs, and maybe even some very small chance it'd have to reduce the dividend. I don't see any reasonable scenario where WFC goes bankrupt or has to severely dilute shares to stay solvent. The rules made for banks during the financial crisis have made them much safer and much more prepared for disaster. While I definitely am not rooting for this scenario, I see WFC coming out of it on the other end as basically the same business where many other companies with worse balance sheets in industries that will be more affected are the ones to avoid.

Conclusion
If coronavirus ends up being more of a market scare than truly hurting economies around the world, I see WFC bouncing back 10-20% with the rest of the market. Since so many stocks have fallen similar amounts over the last week, I don't see a ton of differentiation here.

If this truly becomes a longer correction/recession, WFC will certainly be affected some, but with its asset cap limit, its best mode for growth has been the buyback anyway. And buybacks are even more efficient when share prices drop. Because I don't see WFC's business being adversely affected long term, it will come out of this market correction stronger, whether that be in two weeks or two years.

In general I see the large US-based banks focused mostly on domestic loans/trading as well as strong buyback plans doing well. I am long Bank of America (NYSE:BAC) and WFC and rate them both as Buys.