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.
Disclosure:
none