Yaёl Bizouati-Kennedy
·4-min read
Warren Buffett’s Berkshire Hathaway released its much-anticipated earnings and annual letter to shareholders on February 24. The conglomerate’s earnings were a record, reporting $37.4 billion full-year operating profit, and the conglomerate is now sitting on an all-time high of $167.6 billion in cash and equivalents.
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Of note, Berkshire significantly increased its weighting in financial services stock, which could indicate a view that interest rates have hit their highs for this cycle and that the Federal Reserve will lower rates sooner rather than later, as GOBankingRates previously reported.
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And Berkshire’s 10Q filing for the third quarter of 2023 indicated an unexplained purchase of $1.2 billion of “banks, insurance, finance” stocks, according to David Kass, Clinical Professor of Finance at University of Maryland, Robert H. Smith School of Business.
Asked why the Oracle of Omaha is big on the banking and insurance sector, Peter Earle, Senior Economist for the American Institute for Economic Research, said that there are several factors lining up which could bode very well for the financial sector broadly over the next few years.
“The Fed has strongly indicated that sometime in 2024 they’ll begin lowering rates. Because higher interest rates represent an elevated cost of doing business, lower rates would be great for financial sector margins,” said Earle. “There’s also a view that a soft landing in the U.S. economy is increasingly likely. A stable and (hopefully) growing economy means more savings, more borrowing, and more investing, all of which benefit the various sub sectors of the financial industry.”
Here are some of Buffett’s bank stocks.
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1. American Express: 20.6% stake
As of the morning of March 5, the stock was up 15.75% year-to-date and 21.7% in the past year.
Matt Willer, managing director of capital markets and partner at Phoenix Capital Group Holdings, said he “loves” Amex.
“It’s a great performer, light on the yield, but it’s a strong credit quality play that has excellent management and also exposure to high net-worth individuals and corporations, which tend to be less linearly exposed to economic softness,” he argued.
2. Ally Financial: 9.6% Stake
As of the morning of March 5, the stock was up 3.76% year-to-date and 22% in the past year.
According to Willer, Synchrony recently acquired Ally lending, “and it’s just a pass for me based on this credit box, which I am not convinced is out of the woods yet.”
3. Bank of America: 13% Stake
As of the morning of March 5, the stock was up 3.92%% year-to-date and 3.34% in the past year.
Buffett invested $5 billion in Bank of America convertible preferred in 2011, which converted into 700 million common shares of Bank of America at $7.14, said Kass.
“At their current price of about $35, these shares have quintupled since 2011, resulting in a compounded annual rate or return of over 13%,” he noted. “Under the leadership of [chairman and CEO] Brian Moynihan who is highly regarded by Warren Buffett, these shares represent a solid long-term investment.”
4. Capital One: 3.3% Stake
As of the morning of March 5, the stock was up 3.78% year-to-date and 26.36% in the past year.
Capital One is most likely an investment by either Ted Weschler or Todd Combs, Buffett’s portfolio managers, said Kass. In February, Capital One said it was acquiring Discover, a deal that would expand its presence in the highly profitable credit card area..
5. Citigroup: 2.9% Stake
As of the morning of March 5, the stock was up 6.26%% year-to-date and 8% in the past year.
As Bloomberg reported, in January, Citigroup CEO Jane Fraser said Buffett-one of the bank’s largest shareholders- had urged her to continue with the bank’s reorganization efforts.
According to Morningstar, while Citigroup isn’t Berkshire Hathaway’s favorite bank, the “stock is more attractive from a valuation perspective today.”
6. Nu Holdings: 2.3% Stake
As of the morning of March 5, the stock was up 35.3% year-to-date and 122.22% in the past year.
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Per Kass, Brazil-based digital bank Nu Holdings was an investment of Todd Combs at its initial public offering (IPO) and it has “a bright future.”
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This article originally appeared on GOBankingRates.com: These Are the 6 Bank Stocks in Warren Buffett’s Portfolio: Should You Invest?
