By our guest contributor Insider Monkey. As we begin to ponder what sectors will rule the markets in 2014, technology, healthcare and industrials are areas that many pundits point to. If you ask Warren Buffett, though, he’ll provide a decidedly different answer.
On CNBC earlier this week, Buffett gave a ringing endorsement to large-cap banks, revealing that he thinks they’re “in best shape [he] can remember.” While anyone who tracks Berkshire Hathaway’s equity portfolio probably had a hunch Buffett is upbeat on banks—over 40% of his holdings are invested in the financial sector—these new comments indicate we should expect his bullishness to continue into next year.
By focusing on the best picks of the best hedge funds and other elite investors, it’s possible for retail investors to beat the market over the long-term (discover the data behind this phenomenon). Buffett is the cream of the crop and in light of his recent comments, we should take note of how he’s playing the banks.
Wells Fargo [WFC] is unequivocally the billionaire’s biggest banking bet, and his largest equity holding at that. The global giant is lauded for its management practices and simple business model, and its connection to Buffett has helped it land financing and advisory roles in multiple Berkshire acquisitions.
While shares of Wells Fargo are up nearly 25% year-to-date and the bank did beat Wall Street’s third quarter earnings estimates, its home lending business has been hurt by falling mortgage applications. Still, Wells’ long-term growth prospects and scale advantages remain intact, and Buffett has to love its price at a mere 10.6 times forward EPS. Don’t ignore the 2.8% dividend yield either; it's the best payout among the ‘Big Four.’
US Bancorp [USB] is Buffett’s No. 2 bank holding. Due to its attractive valuation, solid dividend yield, and strong growth prospects, many analysts know this regional player as a mini-Wells Fargo. In fact, US Bancorp is the only big bank that generates higher ROE and ROA figures than Buffett’s top pick.
His investment in Goldman Sachs [GS], meanwhile, now represents a major portion of Berkshire’s stock holdings. We discussed the intricacies of Buffett’s new $2 billion investment in Goldman here on MarketWatch last week, but all you need to know is that he doesn’t plan to close it any time soon.
The investment banking and brokerage firm has sentimental value for the billionaire, and it pays just 12% of its earnings out as dividends. Like Wells Fargo and US Bancorp, Goldman’s growth prospects are extremely cheap at current prices, and the multifaceted nature of its business gives Buffett exposure to an area of the financial sector that his other bank stocks don’t.
M&T Bank [MTB] and Bank of New York Mellon [BK] are a couple more Buffett favorites, and both are actually the final two bank stocks held in the top 20 of Berkshire’s equity portfolio. M&T Bank has been a staple in Buffett’s holdings for more than two decades, and it’s the only large U.S. bank that didn’t trim dividend payments during the financial crisis. The bank’s quarterly profit streak of nearly 40 years is legendary, and it’s no secret that Buffett is a fan of M&T CEO Robert Wilmers.
BNY Mellon, lastly, has been in Buffett and Berkshire’s good graces since the third quarter of 2010, and the stake was increased by 30% in their last 13F filing. The trust bank can see its bottom line improve if interest rates increase in the future. Uncertainty surrounding the fate of borrowing costs over the long-term is one reason why BNY Mellon could be considered undervalued.