The Motley Fool: Wells Fargo in position to gain with rising rates

The prospect of rising interest rates has some investors nervous, but the financial industry tends to benefit from a rising-rate environment. That puts Wells Fargo (NYSE: WFC) in a prime position to build on its long-term performance with gains in the years to come.

While many big banks have been seeking to downsize in order to avoid greater regulatory scrutiny and to make their balance sheets look more attractive, Wells Fargo has gone in the opposite direction, becoming the third-largest bank by assets as it continues to follow its business model of making conservative yet lucrative loans to consumers and commercial customers. Its track record of avoiding some of the excesses that its peers experienced during the financial crisis has only added to its reputation.

Wells Fargo is more profitable than many of its peers, and tends to have more excess capital than it needs to, making it more able to withstand unexpected losses without running into trouble. That may come in handy, as it recently saw a jump in problematic loans primarily made to the oil and gas industry that has been struggling due to low prices.

Meanwhile, Wells Fargo offers patient believers a dividend that was recently yielding 3.1 percent, and its share price seems fairly priced. Consider buying in, or waiting for a lower price. (The Motley Fool owns shares of and has recommended Wells Fargo.)

Ask the Fool

Q: When is the right time to sell a stock? - A.P., Baton Rouge, Louisiana

A: That’s a critical question, because your investing results ultimately depend on the prices at which you bought and sold a stock. Consider selling if you have a significantly more promising place to put your money. (If you find only a slightly more attractive place, the tax hit on any capital gains might wipe out the value of moving your money, unless the stock is in an IRA.)

You might also sell if the stock is now significantly overpriced or if the reason you bought the stock is no longer valid. (Perhaps, for example, it’s losing market share or is mired in a scandal.) Definitely sell if you’ll need the money within three to five years, because anything can happen in the short term. Keep money you’ll need soonish in more stable places, such as savings accounts or CDs.

Selling also makes sense if you don’t know much about the company and can’t explain exactly how it makes its money, if you’re just holding for emotional reasons, or if you can’t remember why you bought it. Whenever you buy a stock, it’s good to jot down why you did so and when you might sell - and to revisit the reasons periodically.

Q: How big or small are “large-cap” and “small-cap” companies? - D.W., Rochester, Minnesota

A: Definitions vary, but here’s a reasonable one: If a company’s market capitalization is less than $250 million, consider it a micro-cap; $250 million to $1 billion, a small-cap; $1 billion to $10 billion, a mid-cap; and $10 billion or more, a large-cap. Nike, Costco and Visa are large-caps, while Cheesecake Factory and Xerox are mid-caps.

My dumbest investment

I answered the phone and was greeted by a pitchman who said he had the deal of a lifetime for me! What was it? Investing in bull semen - specifically, a penny stock specializing in “beef genetics.” I bit. It was only money in my IRA, after all, so it’s play money, right? My broker bought it for me, while urging me to avoid it at all costs.

Of course, the company quickly disappeared, along with my $500 investment. But I now have the certificate framed on my wall as a cautionary tale to avoid hot tips and speculative investments. - R.M., Springfield, Virginia

The Fool responds: Many people lose a lot more than $500 to learn that lesson. You committed a classic blunder, being drawn into a penny stock with some kind of exciting, promising story - but, very often, little in the way of actual sales and profits.

Being able to spend $500 on 2,000 shares of a stock trading for $0.25 per share can seem better than buying, say, five shares of a $100 stock. But penny stocks are notoriously volatile and often manipulated, frequently causing naive investors to lose most or all of their money. A $100 stock, meanwhile, can belong to a growing, profitable company that’s on course to increase its value considerably over time.

Finally, take your IRA seriously, as it can help you accumulate funds you’ll really need in retirement.