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Think about having the opportunity to invest in two different companies that Warren Buffett “guaranteed” would be successful. He is one of the wealthiest men in the world after all. As an investor, most individuals would jump at this opportunity for the chance to invest just like the multibillionaire.

Do you think this is pie-in-the-sky thinking? I’m happy to tell you that it’s not.

Warren Buffett recently issued his personal guarantee on the controversial bank sector.

In the middle of January, the Oracle actually guaranteed that the US banking segment is safe.

“The banks will not get this country in trouble, I guarantee it,” said Buffett.

“The capital ratios are huge, the excesses on the asset side have been largely cleared out… We own bank shares and I personally own stock in banks… I do not see a problem in these things.”

I’d say it’s very clear that Warren Buffett is committed to the banking sector, and he proves it more than in just words. Over 37% of the $75 billion portfolio of Berkshire Hathaway is interested in the banking sector, and their money has purchased stocks such as Wells Fargo and Company, M&T bank and U.S. Bancorp.

Let’s now take a closer look at the two stocks Warren Buffett has a very large stake in.

M&T Bank

After letting go of nearly 1 1/2 million shares of this stock in early 2010, Warren Buffett is now buying this stock once again, and he has recently purchased over 18,000 shares during the third quarter of 2011. He hasn’t had any other activity with the stock since then, but he does own a total of 5.5 million shares of the bank. This represents a little over 4% of the company’s outstanding shares, and it is valued at around half a billion dollars.

The bank itself has $78 billion worth of assets, and it is in the top 20 largest commercial bank holding companies in the United States of America. Over the last five years, the company has increased their revenue at a 4.4% rate of return, their free cash flow has risen by 18.6% in the book value goes up 6% annually.

Buffett bases his purchasing decision on very specific metrics, and they are all showing strong signs of improvement. The tier 1 common ratio, which is what measures the financial strength of the bank, is now at 7.5%. This has risen from 6.9% just one year earlier.

Since September 2012, the technical picture shows us that M&T Bank’s stock has been on the rise. But it has unfortunately hit heavy resistance at $104 per share. It currently has a 12 month target of $110 per share, and investors might want to wait for it to break through resistance before investing.

Wells Fargo

Unless you have been living under a rock lately, everybody knows that Warren Buffett loves this bank. He has been buying shares since 1989. He has actually purchased more than 12 million shares of the company starting in the first quarter of 2009, and ending during the third quarter of 2012. In total, Berkshire Hathaway owns over 422 million shares of the bank. This roughly translates to about 8% of the company, and it’s worth over $14 billion.

We have been seeing improvements with this bank all across the board over the last five years. The company revenue annually grows at a rate of 10% to reach $21.9 billion. The EBITDA increases annually by 4% to the tune of 36.3%. They have ramped up their book value to over 14% during the same five years, and it is now $27.47 per share.

The bank deposits have increased by over 7% to the tune of $929 million just one year ago. The bank’s tier 1 common ratio has expanded to 10.1%. It was just 9.5% last year at that time. The total risk to asset dropped from 11.2% to 10.8% year-over-year. On the flipside, the nonperforming assets dropped from $25.3 billion to $24.5 billion just during the third quarter of 2012 alone.

If you look at the short-term technical picture, the stock price has bounced from its mid-November lows and it’s now pushing to break through its resistance at the $35 range. If you plan to invest, you should wait for a daily breakout above $36 per share and it needs to close above this price. The 12 month target is $40.

Some risk to consider: the banking sector in the United States of America is not necessarily out of the woods just yet. There is massive mortgage default overhang and ultralow interest rates, and this shows us that there are still difficult times ahead for the sector. Warren Buffett is guaranteeing that the bank sector will move in a positive direction, but he never promised that you will make any money buying his stock picks. Hedge funds call Warren Buffett’s words “talking his book”. This basically means that he is promoting his own holdings.

Now that we have that out of the way, it’s very clear that banks have made great strides over the past several years. It probably isn’t wise to buy either of these bank stocks right now, even though Warren Buffett tells you it’s worth it in his own words.

If you would like to track and follow Warren Buffett’s example, it would make sense to wait for a breakout close above $104 per share for M&T Bank and for a $36 breakout for Wells Fargo. The good thing is that Warren Buffett is singing the praises of the entire banking sector, and that will definitely help the share price improvement for these stocks.

We’ve been seeing the recent data that shows us the price of homes are rising. We’ve also noticed that the foreclosure rates have dropped considerably. The mortgage refinancing and lending industry is expecting gains. Wells Fargo’s third-quarter earnings will cause both Warren Buffett and Berkshire Hathaway to sing the praises of the housing recovery.

The 2011 rebounds in the housing market were weaker than expected, and that slowed down Warren Buffett’s talk about the rise of the mortgage industry. But looking at the strong loan growth volumes of Wells Fargo could very well be an early warning sign that a true housing market rebound is finally taking place. So far we have only seen a couple of false starts.

The housing market has lagged considerably during the overall US recovery. Warren Buffett actually apologized in his annual letter in 2011 when he forecasted a full-blown recovery. He said “I was dead wrong,” which he mentioned in this year’s letter. But Warren was still very optimistic in regards to an overall housing recovery, which he stated on CNBC in a July 12 interview, “[In] residential housing, we’re seeing a pickup. It’s noticeable. It’s from a very low base.”

The third quarter is actually expected to be fairly weak for large-cap banking underwriting, as well as advisory revenue and trading, there are many Wall Street analysts that now tell us that refinancing and mortgage lending has picked up. They are also going to be one of the main drivers of industry wide earnings. Wells Fargo is currently the nation’s largest mortgage lender, and they are slated to gain the most from a pickup in the housing market. Their shares have actually gone up 30% year to date, and this is due to a very strong loan growth taking place during 2012.

Wells Fargo, as well as many of the other banks in the sector, need to wonder whether or not the pickup in housing will offset some of the negative areas like lower interest rate-based earnings.

We learned about QE3, which is the plan that the Federal Reserve told us about during September, and it is going to be their third easing effort. Their plan is to buy $40 billion in mortgage bonds per month for the foreseeable future. This is going to keep interest rates near zero through mid-2015. We have been warned by many experts in the banking sector, and they are telling us that this easing effort may really hurt the earnings of the banking sector for 2013.

“[We] need to determine the relationship between the expected (and rather substantial) net interest margin compression and the strength in mortgage banking income,” according to Stifel Financial analyst Christopher Mutascio, during his earnings preview of the third quarter. Does the strength in mortgage banking activity more than offset a net interest margin that is expected to compress roughly 15 basis points during the quarter?,” noted the analyst.

Mutascio believes that Wells Fargo and their impressive earnings growth could falter if they guide lower due to drops in interest rate based earnings.

Matt O’Connor, analyst for Deutsche Bank, downgraded PNC Financial and Wells Fargo. He lowered them from a buy to a hold. The reason being that the interest rate pressures and their ability to maintain such strong mortgage lending growth.

“We believe WFC is best positioned for mortgage activity remaining stronger than expected given its market share of about one third… However, both of these are well-known and we believe already reflected in the stock,” says O’Connor. He actually recommends Fifth Third Bank and Goldman Sachs as the banks that are going to outperform based on quarterly earnings.

The housing market is one of the major “bets on America” from eternal optimist Warren Buffett. In his annual letter – as well as his most recent commentary – he has stressed that there is still quite a ways to go with overall housing market improvement.

It’s still relatively certain that big mortgage underwriting volumes are going to play a large role in whether or not megabanks, as well as Wells Fargo, can experience any third quarter growth, and make more money due to Fed induced earnings hits. But the bigger question that we need to look at in regards to the economic recovery and the overall US housing market is what does this say about these particular events. If the US economy picks up quickly, then Warren Buffett may want to begin speaking bullishly about the housing market recovery.

No matter what, Warren Buffett and Berkshire Hathaway are definitely positioned correctly for an economic rebound. Berkshire owns stock in Clayton Homes, which is the largest producer of homes in the United States of America. They also own stock in paint retailer Benjamin Moore. But not only that, they own other businesses focused on the housing market such as Acme brick, Shaw carpets, Johns Manville for insulation, and their roofing play in MiTek. Plus, the big banking bets that Berkshire owns which will certainly benefit from housing activity are Wells Fargo, U.S. Bancorp, BB&T and M&T Bank.

The bank stock investors definitely have some choices that they are going to need to make since the largest banks in the nation have just reported their quarterly earnings.

Do these investors want to take a risk and chase the earnings rebound that is bound to happen at the major banks like Citigroup, Bank of America, and J.P. Morgan Chase Bank? There’s the potential for their shares rising well above single digit price-to-earnings multiples. Or better yet, would it be a better idea to invest in the safer premium priced lenders like U.S. Bancorp, BB&T, M&T Bank and Wells Fargo?

The one thing I can say for sure is that if you followed Warren Buffett’s lead, and invested in the traditional lenders such as Wells Fargo, then you would have implemented a very effective yet simple strategy. This industry is normally marked by high risk and earnings numbers that are very hard to understand.

To put it quite simply, Warren Buffett who is also known as the Oracle of Omaha, made the choice to invest his money in banks that were growing earnings through mortgage lending rebounding a bit, as well as low-cost share repurchases that are now going up in value.

On the flip side, Warren Buffett has hesitated when it comes to putting more money behind the players more oriented toward the capital markets such as J.P. Morgan, and he’s even backed off of the Wall Street investment banks such as Morgan Stanley and Goldman Sachs since they are at risk from the malaise on Wall Street, as well as the European debt crisis and new regulations that are coming into play each and every day.

Buffett has been sticking with the mid-teen price multiples of U.S. Bancorp, M&T bank, and Wells Fargo, as opposed to going after the single digit P/E ratios of some of the previous banks mentioned in the paragraph above.

Buffett chose to avoid making common stock bets in investing banks, which is why the investments Buffett made in the financial sector are outperforming those of his peers by a wide margin. The second quarter earnings of the bank stocks that he owns definitely reaffirmed that his way of investing is certainly the smart way to go. Wells Fargo and J.P. Morgan Chase Bank both started off this earnings season with much stronger than expected numbers, and Wells Fargo even outperformed expectations, which I learned according to data released by Bloomberg.

When you take a close look at Buffett’s portfolio of bank stocks, the outperformance is a marked improvement which you will certainly notice.

The top performers in the banking sector of the Standard & Poor’s 500 index, since earning season began are both M&T Bank and U.S. Bancorp. And the laggards in the banking sector are Bank of America, Goldman Sachs and Morgan Stanley.

That doesn’t mean that Buffett doesn’t have any investments in either Goldman Sachs or Bank of America. But he made preferred share investments which are extremely safe loans that will guarantee him a return on his investment. This has nothing to do with the regular trading of the common stock, and it’s a totally different type of investment opportunity which is paying off for Berkshire Hathaway.

It’s probably not a great idea to base your investment strategy off of the bank stock gains that have been taking place since the second week of July. But I’d like to point out that the performance of shares is actually reinforcing trends over the last few years which you also see reflected in earnings statements.

Buffett and company are continuing to hold their bank stocks because they believe in the investment in the US economy and recovery, but he did it wisely by smartly placing his money in banks like Wells Fargo (they are projected to be the most profitable bank in 2012 according to computations and analyst estimates from Bloomberg.) There are many other investors who are being lured into subpar investments by placing their money into the large financial banks that have troubled balance sheets and uneven earnings.

The Wall Street crash in 2008 hammered most of the bank stocks, but then in March 2009 the bottom of the stock market crash is where the bank shares began to triple in value for Bank of America and Citigroup, and Goldman Sachs and J.P. Morgan all doubled in value in a one-month period. There are lots of analysts and investors in the financial sector who believe that those mega gains could be duplicated once again in the very near future.

But the truth is that our nation’s biggest investment banks have totally underperformed, but that didn’t stop their shares from rising higher due to some deal making and misplaced optimism.

Between the months of March 2009 through May 2009, the nation’s biggest investment banks were actually the top performers at the time. But things have changed, and since that three-month period, Citigroup, Goldman Sachs, Morgan Stanley and Bank of America have all lost more than 15% of their share value. All of these stocks are part of 10 bank stocks on the S&P 500, out of a total of 85 bank stocks in all, that have taken double-digit losses since May 2009. This information was obtained through Bloomberg data.

J.P. Morgan on the other hand has gained about 20% since that time. But Bloomberg data also shows us that the financial stock picks that Buffett made in M&T, U.S. Bancorp and Wells Fargo have all gained much better returns, and outperformed Chase by a wide margin during that same time.

If anything, I hope this market data will show investors that these large banks with volatile earnings aren’t necessarily the smart play, no matter what the big financial media reports show you. If you were to follow the less glamorous bank stocks that Warren Buffett chose, then you would’ve been much better off and gained some great exposure to consumer and mortgage lender growth.

The strategy is definitely confirmed by the earnings reports that have recently come out in the financial sector. The truth is that the strength in the lending gains are the reason why these earnings have propelled at Wells Fargo, and the reason why they outperformed expectations. The same holds true for J.P. Morgan.

When the second quarter earnings were released, it was learned that Wells Fargo beat the street because of a 35% increase in their quarterly profits. This number was bolstered by housing related activity and mortgage lending. J.P. Morgan, on the other hand, showed major growth in the area of new and existing homes, and they had a 30% year-over-year growth in the mortgage loan origination revenue department. The growth was also 14% sequentially which rose to $43.9 billion. But they showed a sharp drop in profits in the investment bank area.

The fact that J.P. Morgan had a major boost in their home lending earnings was actually a major bright spot throughout the entire second quarter. This was an earnings season that showed a sharp drop in revenue from the investment banks, and the $4.4 billion “London Whale” trading loss. Traditional revenues in investment banking fell a great deal on Wall Street, and in Morgan Stanley’s case they dropped about 50%, and the large bank earnings were unfortunately clouded by a lot of accounting items that only represent a onetime situation. There’s also the possibility that the rate fixing scandal going on at Barclays is going to spread and that will negatively affect the large banking conglomerates.

“With roughly 80% of the banking industry by assets having reported 2Q12 results, the overarching theme of earnings has been continued impressive mortgage banking revenues, surprising [net interest margin] resilience, and modest loan growth,” said Paul Miller who is an FBR Capital Markets analyst in a July 23 earnings wrap. “Given a sustained low rate environment, government mortgage programs, and constrained market capacity, we believe that mortgage banking will continue to be a dominant earnings driver through the end of 2012,” he added.

Banks such as Wells Fargo, Fifth Third, PNC Financial, J.P. Morgan and U.S. Bancorp, who all have large mortgage banking platforms, will all continue to be supported by home buying activity and refinancing, mentioned Miller.

As a matter of fact, the recent earnings numbers actually reinforce some of the things that Warren Buffett forecasted about the housing market in an interview that he gave on CNBC on July 12. He mentions that our economic growth in this country has basically stopped dead in its tracks, but he’s noticing that there is a pickup in the residential housing area, which was a comment that he made in regards to bank earnings.

“The general economy in the United States has been more or less flat, and so the growth has tempered down. But the residential housing, we’re seeing a pickup. It’s noticeable. It’s from a very low base,” Buffett said, who stated that he recognizes that he sort of flip-flopped with his optimism when he was very bullish on this topic of housing in 2011.

There are lots of housing sector analysts and banks that also agree with him. The analysts from Goldman Sachs actually raised their earnings estimates on two of the homebuilders which included MDC Holdings and KB Home, because the analyst believes in a “strong US housing recovery.”

If you are a stock investor that trusts in the fundamentals, you should also consider following Buffett. According to the results of the stress test of the Federal Reserve in March, Buffett led the way with his investments in such areas as U.S. Bancorp and Wells Fargo, and this also pushed forward some share buyback plans and dividend boosts. The Wells Fargo dividend was raised by 83%, and this was followed by an accelerated buyback program which began in the year 2011. U.S. Bancorp, on the other hand, also boosted their dividend by a total of 56%, and they even plan to buy back $3.3 billion worth of shares.