The Oracle of Omaha Likes Banks for the Next Year

As we begin thinking about the sectors that are going to have a big impact on the financial markets in 2014, many of the pundits are pointing to industrials, technology and healthcare. But if you decided to ask the same question to Warren Buffett, he’d give a very different answer.

Earlier last week while on CNBC, Buffett provided an incredible endorsement for large-cap banks, also saying that they are “in the best shape [he] can remember.” If you track the equity portfolio of Berkshire Hathaway it will be no surprise that Warren Buffett is upbeat on banks since over 40% of the company holdings are invested in the financial sector. This shows us that he is still quite bullish on this sector over the coming year.

But which banks should you pick? If you pay attention to the cream of the crop investors and the biggest hedge funds, it can certainly point you in the right direction. It would also help to pay attention to what Buffett himself is doing based upon his recent comments, so checking out how he is playing the banks is definitely a smart move.

Wells Fargo: There’s no question that this is Buffett’s favorite banking bet. It is his largest equity holding at this time. He loves the simple business model and company management. The Buffett connection has provided Wells Fargo the opportunity to play a part in advisory roles in financing opportunities through Berkshire Hathaway acquisitions.

Wells Fargo shares are currently up about 25% year to date, and the company also beat the third-quarter estimates on Wall Street. Its main business model is the home lending business, which has unfortunately been hurt by falling mortgage applications. Regardless, the long-term wealth prospects of Wells Fargo remain intact, and Buffett is very high on the price at a mere 10.6 times forward earnings per share. It also has a 2.8% dividend yield, which happens to be the best payout among the big four banks.

Here’s Buffett’s number two pick…

U.S. Bancorp: This is Buffett’s second-largest pick. It has an attractive valuation, strong growth prospects, a strong dividend yield and it’s a regional player that comes off as a mini Wells Fargo. As a matter of fact, this is the only big bank that generates a higher RAO and REO other than Buffett’s top pick, Wells Fargo. That says a lot for U.S. Bancorp.