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.
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.
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.