The Fed seems bent on raising interest rates in December, and the banking industry is the beneficiary, with legendary investor Warren Buffett hitting the point home with a revelation this week that Berkshire Hathaway has made a $4-billion stake in JPMorgan (JPM).
Since his move earlier this month to buy back nearly $1 billion in Berkshire Hathaway stock, everyone was wondering which undervalued—or not-over-valued—opportunities Buffett would latch onto with that cash-pile.
In total, Berkshire is now placing a bet of around $80 billion in the U.S. banking system, and that goes quite a long way in supporting the emerging theory that investors are eschewing high-flying growth stocks for value stocks.
Based on Wednesday regulatory filings, Buffett’s Berkshire Hathaway conglomerate took a $4-billion stake in JPMorgan Chase last quarter, and also boosted investments in Bank of America (BAC) by 29 percent, Goldman Sachs (GS) by 38 percent, and U.S. Bancorp (USB) by 24 percent, among others. The only bank it didn’t hit up was Wells Fargo, in which Berkshire reduced its stake by 9.6 million shares to around $23.25 billion.
The general consensus emerging is that we should be paying attention to big bank profits this year, most of which have soared even if share prices haven’t reflected that.
The detractors at Bloomberg say bank profits are cosmetic. The six largest reported a total income boost of $6 billion in Q3, but Bloomberg holds that over 80 percent of that was “earnings manufactured by either booking one-time gains, reversing prior losses or paying less in taxes”.
Buffett clearly does not share the sentiment.
Nor do big bankers themselves. According to American Banker, bankers and directors think their stock is a bargain. Since early October, insiders at more than 50 publicly traded banks have spent nearly $10 million buying stock, American Banker said, citing data from FIG Partners and S&P Global Market Intelligence.
For Buffett, at least, it’s all about buying great stocks at fair prices, and banking right now seems to be ‘fair’—if not overly undervalued.
But there’s more to Buffett’s buys than this. He’s always been keen on financial stocks, and he made a big bet on them during the global financial crisis. He also shows favoritism for banks because they can borrow cheaply for long time periods.
And then there’s the Fed, which has raised interest rates three times this year already, and which is expected to raise the again by a quarter percentage point next month. Lending has resumed, and banks have more incentive to loan at higher interest rates.
So, if Buffett’s all over banking stocks right now, what is he shedding? When it comes to tech, he’s still deep into Apple—even if that doesn’t represent a broader love for the tech sector. By the end of Q3, Berkshire had $57 billion worth of shares in Apple, but it also made a $2.1-billion bet on Oracle.
On the shedding side, Berkshire got rid of Walmart (WMT) and pharma giant Sanofi (SNY), and reduced holdings in American Airlines Group (AA), United Continental Holdings (UAL) and Southwest Airlines (LUV), among others.
By David Craggen for Safehaven.com