Legendary investor Warren Buffett, chief executive of Berkshire Hathaway (BRK.B) , has succeeded in a wide variety of industries, including financial services.
Premiums from his insurance holdings finance much of his other investments. Buffett began accumulating shares of insurer GEICO in 1951. It’s now wholly-owned by Berkshire, representing a foundational part of Buffett’s holdings.
Berkshire helped ensure the U.S. financial system’s stability with purchases of Goldman Sachs equity in the financial crisis of 2008 and of Bank of America stock during a turbulent period in 2011. Berkshire also made hefty profits for itself with the deals.
Buffett has also had great success with his investment in credit card titan American Express (AXP) . Berkshire owned $37.5 million of its shares, as of March 31.
Berkshire/Buffett’s financial stocks
Berkshire’s biggest positions in financial stocks (all as of March 31, except as noted) are:
- Bank of America (BAC) , with Berkshire’s stake worth $42.5 billion as of July 19
- AmEx, worth $37.5 million
- Securities ratings agency Moody’s (MCO) , worth $11.2 billion
- Insurance company Chubb (CB) , worth $6.8 billion
- Banking titan Citigroup (C) , worth $3.6 billion
As for banks, Berkshire held JPMorgan Chase, Wells Fargo, U.S. Bancorp and Bank of New York Mellon in the past.
Related: Analysts revamp Berkshire stock outlook after Warren Buffett meeting
Buffett offered an interesting assessment of the banking industry in 1996, as cited by Business Insider. "It's a business that can be a very good business, when run right,” said the Oracle of Omaha (Berkshire is based there).
“There's no magic to it. You just have to stay away from doing something foolish. It's a little like investing. You don't have to do anything very smart. You just have to avoid doing things that are ungodly dumb."
Berkshire just dumped BofA
Last week, Berkshire sold about 34 million shares of Bank of America for $1.5 billion. Given that Berkshire still has a huge position — it’s the bank’s biggest shareholder by far — the sale could just represent profit-taking.
BofA has jumped 27% so far this year to a quote of $42.60. That’s three times Berkshire’s average purchase price of $14 for all of its BofA shares, according to Barron’s. So there’s plenty of profits to take.
But Buffett also could be taking the first step on the road to completely exit BofA. Or Berkshire, which now has a 12.8% stake in BofA, may just want to drive its stake below 10%, Barron’s writer Andrew Bary noted.
That way it wouldn’t have to report trades of the stock to the Securities and Exchange Commission within two business days.
Supportive earnings report
Meanwhile, Bank of America released its second-quarter earnings last week, and most analysts gave the news a positive reception.
“The biggest highlight was the company's encouraging net interest income (NII) outlook for the remaining half of the year,” Morningstar analyst Suryansh Sharma wrote in a commentary.” NII is the difference between a bank’s interest revenue and its interest expenses.
Fund manager buys and sells:
- Goldman Sachs offers 3 high-conviction stock picks
- Cathie Wood unloads shares of rebounding tech titan
- Veteran fund manager sees world of pain coming for stocks
Management expects NII to rise to around $14.5 billion by the fourth quarter from $13.9 billion in the current quarter, he said.
“Profitability in the second half should also be boosted by expense control and relatively strong fee income in the asset-management, investment banking, and trading businesses.”
Sharma plans to increase his $38 fair value estimate for BofA’s stock price by a mid-single digit percentage soon. He assigns the bank a wide moat, meaning he thinks it has competitive advantages that will last at least 20 years.
Related: Veteran fund manager sees world of pain coming for stocks
The author owns shares of Berkshire Hathaway, Bank of America and Goldman Sachs.
