While most of
Warren Buffett 's
$63 billion fortune is wrapped up in
Berkshire Hathaway (NYSE:
, he does own other stocks that are beyond the prying eyes of the
Buffett is a great investor there's no question there.
Berkshire's book value has grown at an annualized rate of nearly
20% for the past half-century. And it would make sense that he
makes great investments in his personal portfolio as well.
One sector where Buffett has found value over the past few
years is banking. Berkshire's #1 stock holding is
Wells Fargo (NYSE:
, with Berkshire owning 8.8% of the bank. Back in 2011, Berkshire
invested $5 billion in
Bank of America (NYSE:
in exchange for preferred shares.
n a 2012
interview with CNBC
, Buffett revealed that he personally owns shares of
JPMorgan Chase (NYSE:
, although Berkshire does not. Buffett has praised JPMorgan's CEO
Jamie Dimon for writing the best annual reports in the
There's no way to know for sure that Buffett is still an owner
of JPMorgan -- but by all indications, he still loves big banks.
(My colleague David Sterman recently profiled
another reviled big bank that's deserving of
Berkshire has been buying more and more shares of Wells Fargo
since 2012. And earlier this year, the firm locked itself into
owning Bank of America's preferred shares until 2019.
Even though the banks have rebounded nicely from their lows
after the financial crisis, there could still be further upside.
All the major banks have underperformed the market over the past
year. Shares of JPMorgan are up a mere 5.1% compared with the
S&P 500 Index and the
Financial Select Sector SPDR (NYSE:
, which are up 17.2% and 10.9%, respectively.
This month, JPMorgan beat second-quarter earnings forecasts
with $1.46 a share, above the Wall Street consensus of $1.30. The
company posted a smaller decline in trading revenues than
expected, and its deposits, card sales volume, client investment
assets and business banking loan originations were all up
year-over-year during the quarter.
Its book value was up to $55.50 at the end of the second
quarter, which puts shares trading at a price-to-book (P/B) ratio
of just under 1.1. Meanwhile, Wells Fargo is trading at 1.65
times book value. JPMorgan also trades at a forward P/E ratio
that's below Wells Fargo and Bank of America.
Assuming the markets for M&A activity and IPOs remain
robust, JPMorgan could be one of the biggest benefactors. One of
the top advisors when it comes to M&A and IPOs, its J.P.
Morgan investment bank remains the top generator of global
investment banking fees. During the second quarter, its advisory
fees were up 31% year over year and equity-underwriting fees were
JPMorgan has been preparing for higher rates for some time.
With employment on the rise and GDP growth strengthening, Wall
Street expects the Federal Reserve to start raising rates in
mid-2015. (My colleague Joseph Hogue looked at why
the market may be misreading the Fed's intentions
on interest rates
JPMorgan has revamped its investment portfolio, where it's
been investing in short-term maturities so that it can reinvest
as rates rise. The other key is that it has spent the past four
years amassing a large deposit base. With deposits of around $1.3
trillion, the bank is the largest in the U.S. by deposits, which
is a huge positive. As short-term rates start to rise, JPMorgan
can invest these deposits at higher rates, earning more income
with little risk.
JPMorgan's dividend pays an enticing 2.7% yield, and the bank
expects to complete a $6.5 billion buyback plan that it
introduced in April by next spring.
Risks to Consider:
JPMorgan is not immune to another slowdown in the global
economy. Trading revenues have been in decline across the
industry, which could put further pressure on earnings.
Action to Take -->
Follow Buffett's lead and buy JPMorgan Chase for upside to $70, a
gain of 18% from current levels. The bank is positioned to profit
from higher rates and has one of the industry's best CEOs at the
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