Wells Fargo brings stability to your portfolio

There’s a lot to like about Wells Fargo (NYSE: WFC), one of America’s largest banks. For example, consider its strong growth and returns for shareholders over the past few decades and its market-leading mortgage and auto lending businesses. (Its stock has averaged annual returns of more than 17 percent over the past 30 years!)

Instead of relying heavily on areas such as trading and investment banking, Wells Fargo focuses on community banking, via loaning money (through mortgages, auto loans, credit cards, etc.) and other relatively straightforward and low-risk operations such as insurance and retail brokerage. Thus, its revenue tends to be more stable than that of its peers.

Wells Fargo has been on a mission to become its customers’ only bank as it cross-sells its products. Its average banking household has more than six separate products with the bank, and Wells Fargo is aiming for eight. Over the past year, Wells Fargo has increased the percentage of its customers with a Wells-issued credit card from 38 percent to nearly 42 percent.

Wells Fargo’s management is focused on expense control, productivity and mitigating risk. It’s highly profitable, and it cruised through the financial crisis arguably better than any other institution in the Western world. It also offers investors a dividend that recently yielded 2.6 percent. Wells Fargo’s easy-to-understand services will always be in demand, and it deserves investment consideration.

Ask the Fool

Q: What’s a “run rate”? – B.G., Slidell, Louisiana

A: It’s a way to get a more realistic view of a company’s performance. Imagine that Carrier Pigeon Communications (ticker: SQUAWK) is growing very rapidly. If you want to estimate its current annual level of sales, you could add up the last four quarters’ worth, but that would clearly understate sales, as each quarter’s numbers have been rising.

So instead, take the most recent quarter’s sales of $30 million (up from $24 million the quarter before and $19 million before that). Multiply that by four, and you’ll have the company’s current run rate for sales: $120 million. It’s not a forecast or a measure of past sales; it’s a reflection of the current level of annual sales.

Q: Should I pass on a company if it’s reporting increased losses per share instead of increased profits? – J.L., Norton Shores, Michigan

A: Not necessarily. Companies sometimes spend a lot more in one year than another. Imagine Home Surgery Kits, Inc. (ticker: OUCHH), a young company. Let’s say it lost about $40 million in 2013 and $60 million in 2014, though its revenues nearly doubled during the same period. Some investors see numbers like this and run the other way, preferring to invest only in companies reporting steadily increasing profits. That’s reasonable.

But those willing to take on more risk may still consider buying, if other factors are compelling. For example, if you have great faith in the future of home surgery kits, you might see the company needing to plow available money into advertising and growing the business. You might reason that the time for profits is later, once the company has amassed a huge customer base.

My dumbest investment

My dumbest investment taught me the value of investigation before buying shares of a company. My co-worker had been watching the meteoric rise of a penny stock. I got caught up in his enthusiasm, sold my shares of a perfectly good mutual fund, and placed a market order to buy 500 shares of the penny stock.

The shares were purchased at a lofty price of $4.25, which the stock never saw again. It was recently trading for less than a dollar per share. This was a $2,000 crash course. – T.H., Merchantville, New Jersey

The Fool responds: Ouch. Penny stocks are dangerous in many ways. They are often tied to companies without proven revenue and earnings, and they’re easily manipulated. Also, they can have wide “spreads” – the difference between the latest price you can buy at (the “ask”) and the price you can sell for (the “bid”). If the spread is very wide, the stock will have to rise significantly just for you to be able to sell and break even. Penny stocks are almost always to be avoided. It’s much better to stick with established and growing companies.