For anyone who has even a glancing acquaintance with the finance sector, Berkshire Hathaway (BRK.A 1.69%) (BRK.B 1.64%) and Wells Fargo (WFC 1.92%) need little introduction. Berkshire, of course, is the vehicle of ace investor Warren Buffett, while Wells Fargo is one of the "big four" U.S. banks with a nationwide footprint.
This, then, is a battle of familiar financials. Which of the pair is the superior investment?
Berkshire vs. itself
Some time ago, I refereed a contest between Berkshire and American Express stock. There's a similar dynamic here, as Wells Fargo -- like AmEx -- is a major Berkshire portfolio holding. In fact it's the major holding by market value, at nearly $28 billion. In spite of recent sell-offs, Berkshire still holds over 464 million shares of the bank, giving it a stake of just over 9.4%.
To be blunt, now isn't the best time to have such a heavy stake in Wells Fargo. Over the past year, the company's stock has risen by only 7% -- well under the 25%-plus increases of the other three in the big four.
Some of this has to do with lingering investor mistrust following the ugly accounts scandal at the bank last year (plus a clutch of subsequent controversies). Compounding this, Wells Fargo's fundamentals haven't improved as much as many of its peers'. These banks have benefited from being at a favorable point on the economic cycle, and gradually rising interest rates.
Wells Fargo's third quarter is a good example -- in contrast to the same quarter for the rest of the big four, total revenue slumped on a year-over-year basis (by 2% to $21.9 billion), while net profit declined by almost 20% to $4.6 billion. Both results fell short of analyst expectations.
Berkshire, meanwhile, has also had its hiccups during the year. There was the company's failed bid for utility Oncor Electric Delivery, for example. Subsequent to that, its $15 billion commitment to another big portfolio holding, food conglomerate Kraft Heinz, to acquire consumer goods megalith Unilever came to nought.
But those negatives were more than offset by numerous positives for the company. Most spectacularly, it cashed out on a whopping 700 million common shares of Bank of America, the culmination of a financing deal it inked with the bank in 2011.
These days, Bank of America is in far better shape than it was back then, hence its share price appreciation of over 200% from then to now. When Berkshire pulled the trigger on those warrants, it booked an immediate paper profit of $12 billion.
All in all, Berkshire continues to do well with its portfolio. Between the end of the company's fiscal 2016 and the conclusion of its Q3 2017, the total market value of its equity holdings increased from $129 billion to almost $190 billion.
The stock to bank on
Wells Fargo certainly isn't the flavor of the moment for bank investors, but we should keep in mind that it's still very profitable and has a commanding lead in the all-important mortgage segment. It certainly has some value as an investment, although I'm concerned that it doesn't seem to be stemming the flow of scandal. This suggests deeper problems in management and corporate culture that might take some time to correct.
Berkshire, meanwhile, is largely a reflection of its leader. Buffett is a straightforward, meat-and-potatoes value investor with a long history of solid profitability. That alone would make me more confident in Berkshire stock. But of course the main reason is the company's sustained overperformance.
Wells Fargo might eventually put the recent scandalous past behind it and kick up some meaningful growth. I don't see enough signs of this happening yet, though, so Berkshire is my pick in this contest.