Why qualitative analysis should matter to Wells Fargo investors


Oct. 3 2014, Published 1:52 p.m. ET

If Wells Fargo & Co were a building

What if we analyzed a company as though it were a building? The strength of analysis would most certainly depend upon two pillars—qualitative and quantitative analysis.

We are all familiar with quantitative analysis. Quantitative analysis relies on two main activities: reading and analyzing financial statements, and valuing companies. Most of what we read refers to quantitative analysis in one way or the other. There is another, and perhaps equally important pillar of analysis: qualitative analysis.

The importance of qualitative analysis

Qualitative analysis is mainly about analyzing services (or products), corporate strategies, and competitive advantages. Qualitative analysis also looks at long-term goals and how a company plans to accomplish those goals.

Broadly speaking, a strategy is a long-term plan that the organization uses to achieve its desired objectives. Such objectives may include increasing business metrics (such as income, net profit, and return on equity), or increasing long-term shareholder value. Strategies can have many aspects.

Strategic direction is a long-term proposition

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One aspect is geographic reach. Some financial institutions, such as Citicorp, of Citigroup Inc (C), may choose to become true multinationals and operate in many countries. Others, such as PNC Financial Services Group Inc (PNC), a component of the Financial Select Sector SPDR ETF (XLF), may choose to focus only on a particular region of the U.S.

Still others may choose to specialize in a particular area of finance, like the Federal Home Loan Mortgage Corporation, or Freddie Mac (FMCC), does with mortgages.

Drastic strategic changes do not occur frequently. Re-calibrations are more common. But before investing, it’s important to analyze a bank qualitatively, as well as quantitatively. Qualitative analysis is more likely to determine how well a bank will perform over the long term. Quantitative analysis, while important, is more likely to determine short- to medium-term performance.

In this series, we’ll undertake a qualitative analysis of Wells Fargo & Co (or Wells Fargo) (WFC). Because our source material is so vast, we’ll split the qualitative analysis of Wells Fargo into two series. The first part of the series will focus on the company’s geographic reach and the products that Wells Fargo offers. The second part of the series will focus on the bank’s strategies.


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