Last week, I highlighted several stocks across multiple industries that insiders have been buying during this month’s stock market correction. This week, I want to focus on five financial stocks that insiders have been buying -- four of which are excellent long-term investment opportunities. The stocks are listed in descending order of attractiveness. Please note that the range of long-term returns is based on estimates for a conservative base case (low figure) and an upside scenario (high figure). These returns are subject to volatility/ uncertainty and the actual results could fall below (perhaps well below) the indicated range.
Berkshire Hathaway (NYSE: BRK-B )
Buyers in August: 1 board member (Donald Keough, ex-president of Coca-Cola)
Largest purchase: $843K: 8 shares @ $105,416 (equivalent to $70.277 per ‘B’ share)
Is the purchase meaningful?: Yes. Keough is a good businessman and it’s a sizeable buy.
My verdict: Ultra-high conviction. I have written this before, but I think it bears repeating due to the nature of the opportunity: There are no sure things in investing, but outside of a pure arbitrage, paying a tiny 6% premium to book value to own a piece of Berkshire Hathaway is as close to it as you are likely to get. Given the margin of the safety embedded in current prices and the exceptionally stable and low-risk operating companies that Warren Buffett has assembled under Berkshire’s roof, the shares now represent an extraordinary opportunity. Berkshire should be at or near the top of the shopping list of any investor with cash on hand who wants to take advantage of the volatility in this market.
Expected 10-year total return range: 13%-16¾ % (annualized)
Risk of inflation-adjusted loss of principal over 10 years: Ultra-low
Wells Fargo (NYSE: WFC )
Buyers in August: 1 board member
Largest purchase: $23K: 1,000 shares @ $22.81
Is the purchase meaningful?: Not really -- the purchase is too small.
My verdict: Very high conviction. Wells Fargo’s largest shareholder, Berkshire Hathaway, revealed in its quarterly filing of holdings that Buffett added to the position in the second quarter. The lowest price the shares achieved in the quarter was $25.26; yesterday, they closed at $23.76. In other words, the shares are now 6% cheaper than the very best price Buffett could have obtained. Prior to the purchases made in the second quarter, Berkshire’s cost basis on his Wells Fargo position was $22.33. At one times book value, Wells Fargo represents an excellent opportunity right now, but it is a higher-risk business than Berkshire.
Expected 10-year total return range: 12.5%-21.0% (annualized)
Risk of inflation-adjusted loss of principal over 10 years: Very low
US Bancorp (NYSE: USB )
Buyers in August: Vice Chairman
Largest purchase: $114K: 5,000 shares @ $22.769
Is the purchase meaningful?: Yes, but not hugely.
My verdict: Very high conviction. Just below Wells Fargo sits US Bancorp, the largest and arguably the best-managed superregional bank. The investing thesis here is the same as that for Wells Fargo: You get to buy a well-managed bank with a risk-conscious lending culture at a historically low valuation. At yesterday’s closing price, US Bancorp was valued at 1.36 times book value; outside of the first quarter of 2009, the multiple has never been that low in more than 15 years.
Expected 10-year total return range: 11¼ %-17.5% (annualized)
Risk of inflation-adjusted loss of principal over 10 years: Very low
JPMorgan Chase (NYSE: JPM )
Buyers in August: 2 board members
Largest purchase: $6.8 million: 194,109 shares @ $35.024
Is the purchase meaningful?: Yes.
My verdict: High conviction. JPMorgan Chase is far and away the highest-quality, best-managed universal bank (compare it to Citigroup (NYSE: C ) , for example); however, it has a substantial investment banking business, an activity I don’t find attractive (see the discussion of Morgan Stanley below). On the whole, this looks like an interesting opportunity, but not as interesting as the three mentioned above.
Expected 10-year return estimate: 10.5%-15.5%
Risk of inflation-adjusted loss of principal over 10 years: Low
Morgan Stanley (NYSE: MS )
Buyers in August: 2 outside board members, 3 executives (including the CEO and the CFO)
Largest trade: CEO James Gorman, $2.1 million: 100,000 shares @ $20.6207
Is the purchase meaningful?: Yes, but not as much as you might think. CEO James Gorman may be willing to give up some value on the shares in return for some goodwill with his board and his institutional shareholders.
My verdict: High conviction speculation. Morgan Stanley is one of the two remaining independent investment banks, the other being Goldman Sachs (NYSE: GS ) . As I made clear when I wrote about Morgan Stanley’s insider purchase last week, I don’t consider pure-play investment banks to be suitable vessels for a long-term investment, for a couple of reasons: Beyond the fact that it isn’t shareholder-friendly, I have some genuine concerns about the industry’s earnings power in the post-crisis world. However, at roughly half their book value, the shares look like a potential cigar butt, a situation in which you are simply betting on the rerating of the shares over a relatively short period.
Expected return range, within 3 years: 80%-160% (non-annualized)
Risk of principal loss over the next 3 years: Significant
I like the first four stocks (Berkshire, Wells Fargo, US Bancorp, and JPMorgan Chase) individually, and I think the basket of the four has excellent odds of beating the S&P 500 over the next 10 years (and by a wide margin, say five percentage points annually or more). As with any investment you may be considering, I urge you to perform your own due diligence before acting.
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