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Better Buy: Berkshire Hathaway vs. Wells Fargo

By Eric Volkman – Apr 24, 2019 at 8:16AM

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In this rematch between Warren Buffett's investment vehicle and one of its major portfolio holdings, which stock will emerge victorious?

As any Warren Buffett-watcher knows, one of the top stocks in the man's investment vehicle Berkshire Hathaway (BRK.A -1.76%) (BRK.B -1.67%) is Wells Fargo (WFC 0.40%). Berkshire is also the bank's No. 1 shareholder.

Needless to say, both Berkshire and Wells Fargo are widely held stocks. Which one is preferable, though? I pitted the two against each other late in 2017 and picked the former as the clear winner. But Wells Fargo has shown significant improvement in its fundamentals lately, so perhaps it can take the crown in this rematch.

Warren Buffett

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(Possibly) learning from mistakes

Some pundits feel that, just maybe, Wells Fargo is pulling itself out of the tangle of malfeasance that started with the "fake accounts" scandal of 2016. 

The bank's fundamentals have fared much better than its reputation. In Q2, Wells Fargo convincingly beat analyst estimates, delivering a per-share net profit that was 10% above the expected figure, and revenue that was almost $600 million higher at $21.6 billion. Total deposits -- which we can consider a yardstick for how much consumers trust the bank these days -- fell less than analysts expected.

These developments, combined with the fact that there has been (knock wood) no significant scandal we know of over the past few months, could mean that Wells Fargo is finally improving. Also, since it's currently barred from growing its total assets, the bank is spending like wildfire on share buybacks and its dividend. With a still-depressed share price, its dividend yields 3.7%, a terrific number for the typically stingy banking sector.

Into the stratosphere

Buffett and his crew at Berkshire are careful. They're not about to get embroiled in controversies like the fake accounts scandal. Instead, they operate a fully loaded profit-making rocket that draws its money from a wide variety of sources, notably its insurance business, a set of privately held companies, and of course the vaunted stock portfolio.

Happily, all three have been doing well. Last year, Berkshire's insurance business recovered and then some following a natural-disaster-filled 2017, flipping to a nearly $1.6 billion operating profit from underwriting after a deep $2.2 billion loss. Meanwhile, the privately held companies were collectively very profitable, especially those in the manufacturing, service, and retail categories.

The stock portfolio had its ups and downs, yet the major holdings are generally doing well. Buffett/Berkshire's 2011 bet on Bank of America has really paid off, with a market value that (at the end of 2018) was nearly double its cost basis. Relatively recent addition Apple was also up, if not as spectacularly, and even the Wells Fargo stake is in the black despite the bank's recent problems.

Warren the octopus

Basically, then, what we have is a bank that might be positioned for continued improvement in fundamentals versus an investing whiz operating in a long-tail bull market for stocks.

I like the potential for both companies, but I'm still not convinced that Wells Fargo has entirely put its scandal-laced past behind it. Corporate culture, particularly in a massive company, is difficult to change -- turning it around can take years, not to mention lots of resources. Also, the Fed's asset cap is going to keep the bank from reaching its full promise, no matter how well it's done recently.

Finally, when comparing the two companies, Berkshire is a sprawling, many-tentacled enterprise that can sweep in revenue from myriad sources. For Buffett, many of those continue to look quite lucrative (like railroads, which as a means of goods transport do well in humming economies).

So while both of these stocks are worthy of consideration now, as in my previous contest between the two companies, I'm tagging Berkshire as the victor.

Eric Volkman has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Apple and Berkshire Hathaway (B shares). The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.

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