Why I Sold Wells Fargo - Yahoo Finance

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- By Rupert Hargreaves

Several months ago, I sold my investment in Wells Fargo & Co. (NYSE:WFC). I covered this sale briefly in a previous discussion, but I thought it would be a good idea to take a closer look at the decision and welcome comments from any readers who might have other insights.

When to sell a stock

In my view, there are two main reasons to sell a stock. First, if the investment case changes. Second, if something better comes along.

Of course, these only apply if you have made the right decision in the first place. With that in mind, another good reason to sell is to correct a mistake. If I have made a mistake and bought something I don't understand, I want to sell as quickly as possible.

My decision to sell Wells Fargo was mainly based on opportunity cost. I thought there were better opportunities in the market, but there were other factors at play as well.

In my last discussion, I noted that I sold the holding when it became clear that the lender's outlook was improving, but its problems were more profound than expected.

The group's new CEO, Charles Scharf, has only been at the helm since December 2019. He had a couple of months to get used to the bank before the global economy was thrown into turmoil as the coronavirus pandemic upended businesses around the world.

So far, he seems to be pushing the bank in the right direction, but Wells' performance over the past 12 months has lagged that its large Wall Street peers because it is struggling to compete in sectors such as investment banking. It was also hobbled by the asset cap placed on its balance sheet last year.

As part of his turnaround plan, Scharf has sold Wells' asset management division, and other asset sales have been rumored. Earlier this year, the group also outlined plans to cut $8 billion of costs over the next few years.

All of these actions are needed. A smaller, more efficient Wells should be a good business.

For an investor who bought the company several years ago when interest rates were higher, however, these plans presented a dilemma. I couldn't interpret what the bank would look like when the cost-cutting and asset sale programs were complete. And that was the big challenge.

I couldn't understand whether I would see a return on my investment and what that return would look like.

What I could see was the potential for a return elsewhere in the market, and that's the main reason that pushed me to sell.

An element of a mistake

There's also an element of a mistake here. When I initially invested, I understood that the bank would have to cut costs to remain competitive. This was the main driving force behind my initial investment analysis. If Wells could cut costs and improve margins, I believed higher shareholder returns would follow.

What I missed was the fact that reducing costs usually has an impact on customer service and other factors like research and development. This might not have been a problem if customers didn't have any choice, but they do, and the number of options available to consumers is growing rapidly.

Over the past year, companies like PayPal Holdings Inc. (NASDAQ:PYPL), Stripe and Square (NYSE:SQ) have reported explosive user growth on their platforms. These companies are all still spending and investing, and they have much better reputations as well as better systems than Wells. This revelation led me to the question: Can the bank compete effectively against these companies while cutting costs and shedding businesses? I don't have a definitive answer to that question. That's why I decided to sell up and find a better opportunity elsewhere.

Disclosure: The author does not own any stocks mentioned.

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Why I Sold Wells Fargo - Yahoo Finance

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