Investment Opportunities

An Undervalued Sector Adored by Warren Buffett

For months, I’ve been pounding the table about why American banks are the best value in the stock market…

Why the banks are a “no-brainer” for today’s investors…

And why even their challenges prove their value.

And now it looks like the Oracle of Omaha agrees.

After doing very little through the COVID-19 crisis, Warren Buffett is finally buying a stock…

Buffett’s Berkshire Hathaway (NYSE: BRK-B) just revealed that it purchased 34 million shares of Bank of America (NYSE: BAC) at an average price of $24.

That equates to an $816 million investment, which is a decent chunk of change even for Buffett.

So investors should ask themselves the following…

Is this $816 million all that Buffett intends to spend?

Or will he get aggressive while bank valuations are at current levels?

Buffett Loves the Big Banks

This $816 million investment is not Buffett’s initial purchase of shares of Bank of America.

Far from it…

He went into the COVID-19 downturn already owning a boatload of the stock. Now he is hungry for more.

As of Berkshire’s last required filing with the Securities and Exchange Commission (SEC) on March 31, Berkshire owned 900 million shares of Bank of America – a massive stock position that was then worth just a shade under $20 billion.

And that isn’t Buffett’s only bank…

As of March 31, he also held…

  • 323 million shares of Wells Fargo (NYSE: WFC), worth $9.2 billion
  • 57 million shares of JPMorgan Chase (NYSE: JPM), worth $5.1 billion
  • 151 million shares of U.S. Bancorp (NYSE: USB), worth $5 billion
  • 79 million shares of Bank of New York Mellon (NYSE: BK), worth $2.6 billion
  • 9 million shares of PNC Financial Services (NYSE: PNC), worth $880 million
  • 5.3 million shares of M&T Bank (NYSE: MTB), worth $550 million.

Altogether, Buffett has more than $40 billion invested in shares of publicly traded American banks. Nobody is longer on the sector today than he is.

Historically Cheap Valuations

I have been bullish on the banks in recent months for two specific reasons…

Reason No. 1: Bank balance sheets were in phenomenal shape going into the COVID-19 crisis, and I believe they can comfortably withstand the hit they are taking.

Reason No. 2: Their valuations aren’t just cheap – they are historically cheap.

I learned to value this magic combination by studying Warren Buffett himself…

We can see that Bank of America is cheap by looking at how it is priced relative to its book value. (Book value is the total equity that Bank of America shows on its balance sheet.)

In recent years, Bank of America has mostly traded at 1.2 times book value. Today, the bank trades at just 0.87 times book value. That means its stock price needs to increase 40% to get back to a normal valuation level.
Loan Loss PrevisionsMost of the other major banks are similarly valued today. Some of them are even more undervalued…

We are aware of Buffett’s recent Bank of America purchase because he owns more than 10% of the shares outstanding and is therefore required to alert the market when he adds to his position.

But soon, Berkshire will report on all of the stocks that the company owned as of June 30, 2020. At that time, we will be able to see whether or not Buffett has also been buying additional shares of the other banks that are already in his portfolio…

Or whether he has been adding new holdings to his $40 billion-plus bet on American banks.

So if you won’t take it from me (though you should), take it from arguably the greatest investor of all time

You’d be hard-pressed to find a better deal today than American banks.

Good investing,

Jody


About

Jody Chudley is a Contributing Analyst to Wealthy Retirement. He is a qualified accountant with two decades of experience in the international banking and hedge fund industries as a financial analyst.
His background in finance has made him an expert in deciphering financial statements and uncovering deep value and income opportunities. He has written for various websites and financial magazines with a focus on the resource sector and contrarian investment opportunities.

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