Buffett Bullish On Banks: Wells Fargo & Company (WFC) and More – Should You Too?

Page 1 of 3

Financial services companies are notorious for their complexity and opacity, which confound prediction. Confusingly, Warren Buffett has recently praised banks for their clarity and safety as investments. Could the Oracle of Omaha be wrong, or is Mr. Buffett right as usual?

Below, I will show why active investors should underweight or abstain from financials as an industry. This includes financial stocks like Wells Fargo & Company (NYSE: WFC)U.S. Bancorp (NYSE: USB)Bank of America Corp (NYSE: BAC), and Goldman Sachs Group, Inc. (NYSE: GS) that are long positions for Warren Buffett’s Berkshire Hathaway Inc. (NYSE:BRK.A). Speculators can try to place a cheap bet by looking at valuation, but these bets should be small, regardless of assurances made by the Oracle of Omaha.

Wells Fargo & Co (NYSE:WFC)Recent Developments

According to Wells Fargo Chief Financial Officer Tim Sloan, “Mortgage lending will likely continue to decline as an increase in mortgages for home purchases fails to offset a slowdown in refinancings.” Wells Fargo is the currently the largest mortgage lender in the U.S., and investors have been wondering if the bank can sustain its high profits sparked by a mortgage refinancing boom due to low interest rates. Sloan also said that Wells Fargo still has a “good opportunity” to refinance eligible homeowners. Wells Fargo generated $125 billion in loans during the fourth quarter, a 10% decline from the third quarter. Wells Fargo currently has a P/E ratio of 10.44 and pays a 2.8% dividend yield.

Meanwhile, U.S. Bancorp has invested $930 million in renewable energy projects since 2008. The company invested nearly $250 million in 2012 alone. U.S. Bancorp is the fifth largest commercial bank in the U.S., and the company is expected to earmark over $1 billion in renewable projects over the next five years. U.S. Bancorp announced it will team up with SunPower Corporation (NASDAQ:SPWR) to invest $100 million to install solar-power systems in over 3,000 homes in the U.S. U.S. Bancorp has a P/E ratio of 11.98 and dividend yield of 2.3%.

Bank of America Corp (NYSE:BAC) and Wells Fargo are drawing criticism over their handling of insurance payouts to homeowners impacted by the devastation caused by Hurricane Sandy. According to The Wall Street Journal, they are being pressured by New York Governor Andrew Cuomo to speed up the release of insurance money. Insurance payments are often held by banks and released in stages in cases where properties are mortgaged. According to the article, “Mortgage companies say they operate that way to safeguard the lender’s collateral and protect homeowners from unscrupulous contractors.” Bank of America currently has a P/E ratio of 49.27 and dividend yield of .30%.

Harvey Schwartz, Chief Financial Officer of Goldman Sachs Group, predicted that the banking industry’s average return on equity (ROE) will exceed 12% as some firms shrink or exit businesses. Schwartz said, “I think the industry will migrate to higher returns because it will have to.” Goldman Sachs, the fifth largest U.S. bank in terms of total assets, saw a 3.7% increase in return on average common shareholders’ equity between 2011 and 2012. The bank generated a 10.7% percent return on average common shareholders’ equity in 2012. Schwartz said the 2012 figure was “not particularly aspirational,” and that Goldman Sachs does not have enough information to provide an accurate ROE target. Goldman Sachs has a P/E ratio of 10.95 and dividend yield of 1.30%.

Page 1 of 3
blog comments powered by Disqus
Insider Monkey Headlines
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months Click to see monthly returns in table format!

Lists

5 Retirement Mistakes To Avoid (and Einstein’s Famous Quote)

11 Smartest People in the World

6 Films About the Financial World You Need To Watch (While “The Wolf” is Not Around)

Warren Buffett and Billionaires Are Crazy About These 7 Stocks

The Top 10 States With Fastest Internet Speeds

10 Best Places to Visit in USA in August

Top 10 Cities to Visit Before You Die

Top 10 Genetically Modified Food In the US

15 Highest Grossing Movies Opening Weekend

5 Best Poker Books For Beginners

10 Strategies Hedge Funds Use to Make Huge Returns

Top 10 Fast Food Franchises to Buy

10 Best Places to Visit in Canada

Best Summer Jobs for Teachers

10 Youngest Hedge Fund Billionaires

Top 10 One Hit Wonders of the 90s

Fastest Growing Cities In America

Top 10 U.S. Cities for Freelancers

Top 9 Most Popular Free iPhone Apps

Top 10 Least Expensive Private Business Schools in the US

Top 15 Most Expensive Countries in the World – 2014

Top Businesses to Invest In

Top 5 Things You Might Be Doing Wrong With Your Business

Top 5 Strategic Technology Trends in 2014

Top Rags to Riches Stories

Parenting Behavior That Promotes Future Leaders

Top 5 Mistakes Made by Small Businesses

Top 5 Most Common and Potentially Devastating Financial Blunders

Top 5 Highest Paying Jobs for Web Designers

Top 6 Most Respected Professions that Also Pay Well

Top 5 Pitfalls Investors Should Avoid

Top 6 Lawyers and Policy Makers Under 30

Top 6 New Year’s Resolutions for Entrepreneurs

Top 7 Locations to Check in on Facebook

Top 5 Mistakes made by Rookie eBay Sellers

Top 7 eBook Publishers in 2013

Top 6 Health Industry Trends in 2014

5 Lessons for Entrepreneurs from Seth Godin

Top 5 Success Tips from Jordan Belfort – the Wolf of Wall Street

Best Master’s in Finance Degree Programs

Top 6 Earning Celebrities Over 50

The most expensive sports to play

Top 7 Earning Celebrities Under 25

Best 7 Online Courses to Take: Free Finance MOOCs

Top 6 Bad Habits that Promote Failure

20 Most Valuable Soccer Teams in the World in 2013

12 Most Expensive Countries for Foreign Students

Top 30 Most Influential Women in the World

Top 20 Most Expensive New Year Eve Shows

Top 5 Best Vocational Careers

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!