Winners keep on winning
Investors sometimes tend to stay away from stocks that are rising strongly, especially when they are trading at historical highs. There is nothing wrong with being price conscious when building positions, but make no mistake investing is not about past performance. In fact, on many occasions, the best companies are precisely those that are making new record highs on a regular basis.
Think about some of the most successful investment stories of the last decade, companies like Amazon.com, Inc. (NASDAQ:AMZN), Starbucks or Nike. They have many things in common, like high-quality management teams and strong competitive positions. Also, if we look at them from a historical perspective, they have reached new all-time highs on reiterated occasions on their way to delivering spectacular returns for investors.
The most successful companies usually perform well, so avoiding a stock only because it’s reaching new highs can be a really shortsighted approach, and it could lead to missing out some really outstanding investment opportunities.
Quality and valuation
Valuation is not about past price performance, a stock price needs to be compared against the company´s fundamentals in order to tell if it´s cheap or expensive. The rearview mirror can provide some valuable information, but what really matters is what’s happening through the windshield.
Wells Fargo & Co (NYSE:WFC) provides a great example about the importance of understanding the difference between a rising price and an expensive investment. Even if the bank is trading at historical highs, its price to book value ratio, a well accepted valuation metric for financials, is well below levels prior to the financial crisis.
What sets Wells Fargo & Co (NYSE:WFC) apart from the competition is its high-quality management team with a simple and down to earth approach to the business. Under the leadership of John Stumpf, Wells Fargo & Co (NYSE:WFC) avoided the mistakes made by competitors like Bank of America Corp (NYSE:BAC) and Citigroup Inc (NYSE:C) during the credit bubble. Instead of taking undue risks trying to make easy money in the short term, Wells Fargo continued focusing on credit quality and long-term risk management.
This has provided the financial strength to continue expanding the business while its competitors were still trying to streamline their operations and balance sheets over the last years. Wells Fargo & Co (NYSE:WFC) is now the undisputed leader in the US mortgage market; the bank originated a whopping $109 billion in mortgage loans in the first quarter of 2013, while former industry leader Bank of America Corp (NYSE:BAC) and Citigroup Inc (NYSE:C) originated only $24 billion and $18 billion, respectively.
Rising interest rates, if that is the case in the middle term, could negatively affect the mortgage business. However, the real estate sector still has a long way to go in terms of long-term recovery, and no company is better positioned than Wells Fargo & Co (NYSE:WFC) to benefit from that trend.
