Since becoming CEO of Berkshire Hathaway(NYSE: BRK.A)(NYSE: BRK.B) in 1965, Warren Buffett has put on a master class for Wall Street. Over that time, Berkshire's Class A shares (BRK.A) have doubled the annualized total return of the broad-based S&P 500 (19.8% vs. 9.9%). Berkshire Hathaway's stock could nosedive 99% tomorrow and would still be easily outpacing the S&P 500 over a nearly six-decade stretch.
Time is a key reason Buffett has been so successful. By investing in profitable, dividend-paying companies and allowing time to be his ally, Buffett's company has been able to outperform.
However, portfolio concentration has been particularly important to the Oracle of Omaha's success. Although Berkshire Hathaway has more than $320 billion in invested assets, the vast majority of this capital resides in only four sectors. There's perhaps no sector in which Buffett is more confident in his ability to dissect and detect value than financials.
Despite a large position in Bank of America, Buffett has been selling quite a few bank stocks
Out of the 49 securities (stocks and exchange-traded funds) held by Berkshire Hathaway at the end of 2022, 16 are financials. The sector is a Buffett favorite because of its cyclical ties.
The Oracle of Omaha and his investing lieutenants, Ted Weschler and Todd Combs, are simply playing a numbers game that favors patience. With the understanding that recessions are an inevitable part of the economic cycle, Buffett and his team have positioned Berkshire Hathaway to take advantage of periods of expansion. Whereas every recession since World War II has lasted only two months to 18 months, most economic expansions go on for multiple years. Disproportionately long periods of expansion allow cyclical financial stocks to thrive.
What's quite clear from Berkshire Hathaway's investment portfolio is that Bank of America(NYSE: BAC) is a well-liked investment. BofA is Berkshire's second-largest holding by market value. Including shares held by Buffett's secret investment portfolio, Berkshire's Bank of America stake is worth almost $28.7 billion, as of March 20.
In addition to being well-capitalized and able to take advantage of long-winded growth cycles in the U.S. and global economy, Bank of America is the most interest-rate sensitive of the U.S. money-center banks. Every interest-rate hike from the Federal Reserve is bolstering Bank of America's net-interest income.
But not all big banks are whetting the Oracle of Omaha's whistle of late. In fact, Buffett has been an active seller of big banks since late 2020. Berkshire Hathaway's positions in JPMorgan Chase and Wells Fargo(NYSE: WFC) are no more, while the company's stake in regional banking giant U.S. Bancorp(NYSE: USB)has been reduced drastically in the past couple of quarters.
Jettisoning Berkshire Hathaway's Wells Fargo stake made sense after the bank admitted to opening 3.5 million unauthorized accounts between 2009 and 2016. Buffett has long believed that customer trust and a company's reputation are paramount to success.
Even though Wells Fargo agreed to pay a $3 billion settlement to put this scandal in the rearview mirror, it's evident that Buffett and his investing team viewed this event as a loss of trust. Wells Fargo stock was methodically removed from Berkshire's investment portfolio, and it wasn't a shock.
What has been shocking is seeing U.S. Bancorp, the parent of the more familiar U.S. Bank, shown the door. Based on Berkshire's selling activity in recent quarters, it's quite likely that U.S. Bancorp, which has been a continuous holding since 2006, won't be a holding when Form 13Fs are filed with the Securities and Exchange Commission in mid-May.
But whereas Warren Buffett and his team are actively selling U.S. Bancorp shares, it's the only bank stock I've been buying.
This is the only bank stock I'm confidently buying right now
To be completely transparent, I'm a fan of most of the big banks. I've owned shares of BofA for more than 11 years and it's already one of my largest holdings (and thus why I don't feel compelled to add, at least at this moment). I also opened a position in Wells Fargo in September 2020, which corresponded with the height of the company's legal issues tied to its unauthorized account scandal. However, at this very moment, no bank stock stands out as a more compelling buy than U.S. Bancorp.
There's no question that the past couple of weeks have exposed flaws in the regional banking system. While some of this blame lies with the nation's central bank, it's also the result of various management teams failing to have proper risk modeling in place. Following the collapse of SVB Financial(NASDAQ: SIVB) and Signature Bank(NASDAQ: SBNY), and the rapid downdraft of First Republic Bank(NYSE: FRC), sentiment just about couldn't be worse for the industry.
Thankfully, there's a big, big difference between what ailed SVB and Signature and what you'll find on U.S. Bancorp's books. The latter doesn't have the magnitude of bond duration losses that have crippled SVB, Signature, and First Republic. In fact, U.S. Bancorp's tangible common equity far outweighs its unrealized losses on investment securities for sale, as of Dec. 31, 2022.
But it's not simply that U.S. Bancorp isn't SVB, Signature, or First Republic. It's that U.S. Bancorp is a leader among regional banks and is still firing on all cylinders. Whereas SVB was a go-to for venture capital, and Bank of America piled into riskier derivative investments during the financial crisis, U.S. Bancorp's management team has largely steered clear of higher-risk investments. While focusing on loans and deposits can be boring, these bread-and-butter growth drivers have pretty consistently pushed U.S. Bancorp's return on assets above 1.2%.
U.S. Bancorp's management hasn't been shy about investing in digitization initiatives, either. During the company's fiscal third quarter, which ended Aug. 31, 2022, 82% of the company's active customers were banking online or via mobile app, with 62% of total sales completed digitally. The latter is 17 percentage points higher than when 2020 began. Digital transactions are often considerably cheaper for banks than in-person interactions, which is a big reason why U.S. Bancorp is such an efficient and profitable bank.
Like Bank of America, U.S. Bancorp is also capitalizing on the Federal Reserve's hawkish monetary policy. Higher interest rates on variable-rate outstanding loans have resulted in more net-interest income.
There have only been four instances since this century began where U.S. Bancorp stock could be purchased for less than 20% above its book value: the dot-com bubble, the financial crisis, the COVID-19 pandemic, and right now. Given how consistent this company has been for decades, its forward-year price-to-earnings ratio of 6 and its dividend yield of 5.6% make U.S. Bancorp a phenomenal steal.
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SVB Financial provides credit and banking services to The Motley Fool. Wells Fargo, Bank of America, and JPMorgan Chase are advertising partners of The Ascent, a Motley Fool company. Sean Williams has positions in Bank of America, US Bancorp, and Wells Fargo. The Motley Fool has positions in and recommends Bank of America, Berkshire Hathaway, and JPMorgan Chase. The Motley Fool recommends SVB Financial. The Motley Fool has a disclosure policy.