Warren Buffett’s Favorite Financial Stocks

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Berkshire Hathaway’s 13F filing for the third quarter of 2012 showed that the financial sector was Warren Buffett’s favorite area to invest in last summer; Berkshire had more capital invested in financial stocks than in any other sector. See the full list of stocks Berkshire reported owning. We have gone through the filing and picked out the holding company’s five largest positions in financials by market value. Investors shouldn’t buy stocks just because Buffett likes them, but we think that billionaires’ top picks can make good sources of investment ideas for further research. Here are our quick thoughts on Buffett’s favorite financial stocks:

Buffett’s favorite financial stock was large bank Wells Fargo & Company (NYSE: WFC). The market considers Wells Fargo to be a more stable bank than other megabanks such as Citigroup or JPMorgan Chase, and the stock actually trades at a premium to the book value of its equity with a P/B ratio of 1.2. The bank is using its assets quite efficiently, however, as it trades at 9 times forward earnings estimates- very much in line with its peers. Billionaire Ken Fisher’s Fisher Asset Management increased its stake by 70% to a total of 18.6 million shares, making Wells Fargo one if its ten largest holdings (find more of Fisher's stock picks). JPMorgan Chase might be a better buy, but Wells Fargo is certainly priced competitively with other large banks.

American Express Company (NYSE: AXP), the debit and credit card issuer which also provides credit and travel services, was another of Buffett’s favorite stocks with Berkshire reporting a position of over 150 million shares. It’s also priced cheaply, at 13 times trailing earnings, though the company’s recent results have not been particularly good with revenue and earnings about flat last quarter compared to the third quarter of 2011. That value looks about right, but we’d suggest that investors at least look at low-priced peers such as Discover and Capital One before buying the stock.

The third financial stock in Berkshire’s top ten stocks was U.S. Bancorp (NYSE: USB). The regional bank has an even higher P/B ratio than Wells Fargo, with the stock priced at nearly twice book value. However, as with Wells Fargo it’s tough to call U.S. Bancorp overvalued at a trailing P/E multiple of only 11. Considering that the company grew both its revenue and earnings at a double-digit rate in the third quarter versus a year earlier, it looks like a good value to us. Moore Global Investments, managed by billionaire Louis Bacon, initiated a position of 3.1 million shares during the third quarter (check out more of the billionaire's favorite stocks).

Berkshire owned 5.4 million shares of M&T Bank (NYSE: MTB) at the end of September. M&T is a $12.5 billion market cap regional bank whose P/B comes in at 1.4. It too has been experiencing strong growth, and its net income was 60% higher last quarter than in the same period in the previous year. We’d expect that growth rate to slow, but it still demonstrates a strong-performing business. We’d also note that the stock’s beta is 0.6 with a dividend yield of nearly 3%, so it’s a good financial stock for defensive investors.

Buffett also liked The Bank of New York Mellon (NYSE: BK), a financial services firm whose activities include asset management, custody, and cash management. Berkshire owned close to 20 million shares a the end of the third quarter, up 5% from three months earlier. It’s another cheap stock in terms of its earnings, with trailing and forward P/E multiples of 12 and 10 respectively. In the third quarter, Bank of New York Mellon’s earnings were up 11% from their levels in the same period in 2011 and so it’s another financial stock whose business has been doing well recently. We’d consider it as a value stock at these levels.


This article is written by Matt Doiron and edited by Meena Krishnamsetty. They don't own shares in any of the stocks mentioned in this article.The Motley Fool owns shares of Wells Fargo & Company. Motley Fool newsletter services recommend American Express Company and Wells Fargo & Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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