We Are in the Midst of a Bubble Bubble
Kyle is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Progress Report: Wells Fargo (NYSE: WFC), mentioned 1/4/12 at $28.56 per share, currently trading around $30 per share (intraday, 2/16/12).
As a child growing up I loved bubbles, the more the better. Who am I kidding, I’m in my 40s and I still love bubbles. Apparently everyone with a laptop loves bubbles too, but with a totally different point of reference. I see more bubble articles with respect to dividend bubbles, China bubbles, Apple bubbles, cloud bubbles. It’s beginning to get carelessly ridiculous, so I thought I would offer my own twisted spin on the reckless use of spraying bubbles all over every sector as though on any given day we will be trying to remove sticky remnants of busted chewing gum bubbles in the form of housing or technology, or worse, an entire country, from our face and hair. So before we all have to go grab some ice, peanut butter, or the scissors to get this mess off us, let’s relax and reflect.
First off, a financial asset is commonly referred to as a bubble when the price of the asset (stock, house, Peyton Manning), is higher than the present value of the future income received by owning the asset to its maturity. Now I’m sure we all recall the zany, madcap Dutch tulip bubble of the 1600s, and the aftermath of that bubble burst. Even now in the 21st century you can’t go anywhere without seeing tulips. Don’t recall the bubble that nearly saw the collapse of The Netherlands? I know, tulips, a financial asset? It’s true. Okay, well how about the most recent bubble we had the pleasure of piercing with our incredibly shaky economy? Ah, yes, the housing bubble.
Now even if you aren’t a Minsky scholar (no worries, I’m not either), I’m quite certain that when you were growing up, you possibly experienced getting burned. If you ever had the painful curiosity to touch that glowing red stove element, or stick a key in an electrical socket (true story, I actually did that), unless you were a gluttonous punishment seeker, from that point forward you played it fairly safe around those objects that caused you a substantial amount of discomfort.
Now since my data shows that absolutely none of you (zero), read my noteworthy piece on the financial sector (“Give Me the Yield, Keep the Toaster”), which I will try not to take personally in any way, nobody knows that I suggested banks, specifically regional banks, and the possibility that they may have some positive movement this year. For anyone that follows Warren Buffett, you might come to some sort of conclusion that Wells Fargo, in particular, might be poised for a decent run based on the 7.7% stake his company, Berkshire-Hathaway (NYSE: BRK-B) has in the bank, making him the largest shareholder. Buffett started amassing his shares of Wells Fargo in the 1990s, probably around the time of some other bubble, and he has mentioned the company’s low-cost funds give them a distinct advantage over their peers. Personally I don’t rush out and buy shares of every stock Buffett owns, but as an investor, the man has done pretty well for himself and countless others. And if we do actually have a “dividend bubble”, I wouldn’t be overly concerned with Wells Fargo’s 1.6% dividend yield.
Berkshire also added to long positions with Visa (NYSE: V), which I have enjoyed a delightfully long run and continue to own, and Intel (NASDAQ: INTC), which I also have owned for an intensely long amount of time, but I am currently considering a swap with another technology company that I have mentioned far too many times recently. I think Visa offers investors an opportunity to enjoy the societal shift from cash to credit (or debit, either way transactions have to be processed), and I have praised the company for almost three years now. Visa has raised their dividend in each of the past two years, so don’t be surprised if they raise the current 88-cent per share annual payout in the not too distant future.
So for you fans of blowing bubbles instead of reading about them, give the financials a bit of studying as part of your homework assignment. I’m sure Moody’s will be looming, which will offer some opportunities when share prices drop due to their ominous specter. But fear not, unless we start getting pummeled with far too many stories proclaiming Buffett bubbles or bank bubbles on the horizon. Given the recent housing bubble bursting all over everyone within reach, I think the financial sector is still feeling the burn and will proceed accordingly with no soapy mess or gum on their faces.
Motley Fool blogger Kyle Metivier has long positions with Intel and Visa and is considering a position with Wells Fargo at some point in his investing future. Motley Fool newsletter services recommend Berkshire Hathaway, Intel and Visa. The Motley Fool owns shares of Berkshire Hathaway, Intel and Wells Fargo & Company and has the following options: short APR 2012 $21.00 puts on Wells Fargo & Company, short APR 2012 $21.00 puts on Wells Fargo & Company, short APR 2012 $29.00 calls on Wells Fargo & Company and short APR 2012 $29.00 calls on Wells Fargo & Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.