Q. I hear good things about Wells Fargo & Co. and wonder if its stock is ready for a comeback. — MK, via the Internet

A. The fourth-largest US bank, known for its strong customer relationships, is more optimistic about the economic future than are many of its peers. It has said it sees signs of recovery in its loan business, with loan defaults that are close to a peak or that may have already peaked.

It made fewer home loans and its bad mortgage loans were up in its most recent quarter compared to the prior quarter. However, it received higher fee income from mortgage originations.

In a bullish move, it has announced plans to aggressively hire new financial advisers for its brokerage unit, which is the combination of AG Edwards, Wachovia and Wells Fargo brokerages.

Wells Fargo shares are up eight percent this year following last year's seven percent decline. The bank reported a surprising $394 million profit in its fourth quarter after paying preferred dividends, which was stellar in comparison to its embattled rivals.

This nationwide bank that has been a leader in online banking has more than $1.2 trillion in assets and more than 6,000 offices. It doubled its size with the acquisition of Wachovia. Warren Buffett's Berkshire Hathaway is a shareholder in the bank.

The consensus analyst opinion on shares of Wells Fargo is a weak "buy", according to Thomson Reuters, consisting of six "strong buys", eight "buys", nine "holds", two "underperforms" and three "sells".

Wells Fargo repaid its federal TARP money and has a solid track record of boosting profits from its existing customer base by marketing packages of financial products. About one-fourth of its business consists of non-interest-bearing accounts, making it an industry leader in that highly desirable category.

CEO John Stumpf, who has been with the company since 1982, added the role of chairman after Dick Kovacevich retired at yearend 2009. Despite capital ratios that aren't as strong as some of its peers, the bank has earnings power and is positioned to significantly increase profits as the economy improves. Near-term, however, potential losses on commercial real estate are a concern of not only Wells Fargo but the entire banking industry.

Wells Fargo earnings are expected to increase seven percent this year and 51 percent next year. The five-year annualised growth rate is projected to be 12 percent, versus one percent for the money centre bank industry.

Q. Please comment on Heartland Value Fund. Is it worth putting money in? — DB, via the Internet

A. This fund for long-term investors focuses on undervalued small- and micro-cap companies.

It can invest in any industry and most recently has favored bargain-priced healthcare companies that were whacked by the threat of health care reform. It expects to gain from industry consolidation in the coming years.

The $1.2 billion Heartland Value Fund is up 75 percent over the past 12 months to rank in the upper one-third of small value funds. Its three-year annualised decline of 8 percent places it in the lower half of its peers, while its five-year annualized return of 2 percent puts it above the mid-point.

"This is not a fund that is going to blow up, though because of its concentrated and contrarian approach it can lag the market for certain periods," said Ryan Leggio, analyst with Morningstar Inc. in Chicago. "It is for long-term investors and, because it is very small-cap oriented, it should be a small portion of a diversified portfolio."

Bill Nasgovitz is an experienced manager who has run Heartland Value Fund since 1984. Bradford Evans joined him in 2004 and his son Will Nasgovitz was added to the team early last year.

They seek financially-sound companies with low prices on a historical basis and the potential for improvement. They also do technical analysis to determine if it is the right time to buy a company's stock. The quality of a company's management and leadership in its industry are also heavily weighted. Many of the firms have little or no debt.

"In our small-cap category, this fund has been average," said Leggio. "There has been better performance from funds such as the Heartland Value Plus that focuses on small companies paying dividends."

One-fourth of portfolio is in health care, with other concentrations in industrial materials and consumer goods. Top stocks were recently Analogic, InterDigital, Hollys Automation Technologies, Force Protection, Basic Sanitation Co. of the State of Sao Paulo, BioScrip, Accuray, Swift Energy, Rosetta Resources and Sherritt International.

This "no-load" (no sales charge) fund requires a $1,000 minimum initial investment and has a reasonable annual expense ratio of 1.2 percent.

Q. It seems like a lot of companies are buying back their stock. I'd like an explanation of this. — MB, via the Internet

A. What's actually occurred this year is a large number of authorizations by companies to buy back their stock, following a year in which buybacks hit an all-time low.

The fact they've authorized the buybacks doesn't necessarily mean they will follow through and historically they often don't. Thus far, there haven't been major stock buybacks and whether or not there will be depends on the overall stock market.

"A stock buyback reduces the number of shares outstanding in the market and increases the earnings per share," explained Howard Silverblatt, senior analyst with Standard & Poor's in New York. "And on a short-term basis it provides price support."

Companies buy their stock to pay back shareholders. Stock buyback activity was strong between 2004 and 2007, but no one expects it to reach those levels again anytime soon.

"While companies are authorizing stock buybacks, we're seeing even more activity in dividends," concluded Silverblatt. "Dividends are an even stronger statement by the company, in that you're getting cash you never have to give back and you can expect it again next quarter."

Andrew Leckey answers questions only through the column. Address inquiries to Andrew Leckey, 555 N Central Ave., Suite 302, Phoenix, Arizona 85004-1248, or by e-mail at andrewinv@aol.com

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