Analyzing the earnings of financial institutions is hard as it is; throwing in a billion dollars or more in legal charges each quarter makes it that much more confusing. JP Morgan, Bank of America and Citigroup racked up a cumulative $5.7 billion worth of legal charges in the fourth quarter of 2014 alone, severely distorting their earnings and raising the level of uncertainty as we head into 2015. Add in the fact that trading revenue continues to be subject to massive intra-quarter fluctuations, and it’s understandable why investors are increasingly inclined to stay clear of these names. Though this sentiment is completely understandable, make sure not to throw the baby out with the bathwater when it comes to financials. With the rest of the market trading at historically high valuations, financials are one segment that actually looks cheap on a relative basis. So if not the bulge bracket banks, where do you turn? I think it’s worth taking a look at Wells Fargo – a company that offers scale, diversity and a low-risk/highly visible business model. It faces no legal charges, and since it is largely a commercial bank, it is not subject to trading volatility that is the bane of existence for the investment banking community. The company has waded through the low interest rate environment with remarkable dexterity and it should reap the fruits of its labor once rates rise. In a sector known for its complexity, investors will reward simplicity.
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