August 14, 2015 - Buying the Best Company at the Point of Maximum Pessimism

Stocks goes up for one reason and that is expectations has changed for the better. Human behavior dictates all others. The only use for fundamental analysis is to see if the company can wither through any extreme downturns in the market. As long as the company doesn’t go bankrupt, future expectations are what drives the price of the stock.

Therefore, the strategy for achieving 10% – 20% return is to purchase the strongest company during the point of maximum pessimism.

To find the industries in the worst conditions we compare the percentage of each sector to determine which sector has the highest number of companies within 5% of their 52-week lows. (Data taken on August 13^th, 2015)

Next, we dig deeper into the Finance industries to determine which industry is of the highest pessimism.

The following criteria in the picture below were used to find companies that could constantly grow in excess of 10% or more. Only one company made the cut in this pessimistic industry.

This company is Wells Fargo (WFC) – Data taken on August 13^th, 2015

A strong company entails the following beyond fundamentals – meaning, moat, management, margin of safety.

1.       Meaning – Wells Fargo is a provider of banking, mortgage, investing, credit card, insurance, and consumer and commercial financial services. An American multinational banking and financial services holding company which has roots to millions of U.S. citizens. It has meaning to a large group.

2.       Moat – Wells Fargo strongest advantage are the systems that Wells Fargo developed to not only retain customers, but to sell them additional products. This emphasis on cross-selling provides clients a menu of higher-yielding alternatives, the nation's fourth-largest bank by assets is able to keep those funds within the confines of its holding company. It diversifies Wells Fargo's revenue stream away from originating loans. The net result lowers the bank's overall risk profile and retain clients from competition.

3.       Management – CEO John Stumpf and the management team at Wells Fargo speaks the language of an investor. They have continue to increase dividend payments and authorized share buyback plans while efficiently using earnings to grow the company at a sustainable way and optimizing current operations to increase efficiency.

4.       Margin of Safety – Wells Fargo currently trades at a price to book of 1.78 –less than the P/B ratio cut off of 2 which makes it a good opportunity to purchase shares.