On February 24, Warren Buffett’s Berkshire Hathaway released its much-anticipated earnings report and annual letter to shareholders. The conglomerate’s earnings were a record, with $37.4 billion in full-year operating profit, and it now has an all-time high of $167.6 billion in cash and equivalents.
Berkshire has significantly increased its weighting in financial services stocks, which could indicate that interest rates have reached their peak for this cycle and that the Federal Reserve will lower rates sooner rather than later, as GOBankingRates previously reported.
Berkshire’s 10Q filing for the third quarter of 2023 also revealed an unexplained purchase of $1.2 billion in “banks, insurance, and finance” stocks, according to David Kass, Clinical Professor of Finance at the University of Maryland’s Robert H. Smith School of Business.
When asked why the Oracle of Omaha is investing heavily in the banking and insurance sectors, Peter Earle, Senior Economist for the American Institute for Economic Research, stated that several factors are aligning that could bode well for the financial sector as a whole in the coming years.
“The Fed has strongly indicated that interest rates will be lowered beginning in 2024. “Because higher interest rates represent an increased cost of doing business, lower rates would be beneficial to financial sector margins,” said Earle. “Some believe that a soft landing in the US economy is increasingly likely. A stable and (hopefully) growing economy means more savings, borrowing, and investing, all of which benefit different sectors of the financial industry.”
These are some of Buffett’s bank stocks.
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% over the previous year.
Matt Willer, managing director of capital markets and partner at Phoenix Capital Group Holdings, stated that 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 said.
2. Ally Financial, 9.6% stake
As of the morning of March 5, the stock was up 3.76% year to date and 22% over the previous year.
According to Willer, Synchrony recently bought 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% over the previous year.
Buffett invested $5 billion in Bank of America convertible preferred stock in 2011, which converted into 700 million common shares at $7.14, according to 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 said. “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% over the previous year.
According to Kass, Capital One is most likely an investment by Ted Weschler or Todd Combs, Buffett’s portfolio managers. Capital One announced in February that it would acquire Discover, expanding its presence in the lucrative credit card market.
5. Citigroup: 2.9% stake.
As of the morning of March 5, the stock was up 6.26% year to date and 8% over the previous year.
As Bloomberg reported in January, Citigroup CEO Jane Fraser stated that Buffett, one of the bank’s largest shareholders, had urged her to continue with the bank’s reorganization efforts.
According to Morningstar, while Citigroup is not Berkshire Hathaway’s preferred 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% over the previous year.
According to Kass, Todd Combs invested in Brazil-based digital bank Nu Holdings during its initial public offering (IPO) and believes it has “a bright future.”