The past few months in the stock market have been interesting, to say the least. After plunging into a bear market faster than it ever has before, the S&P has rebounded sharply and is now just 12% below its all-time high. And to be sure, most of the fire-sale stock prices we saw in late March and early April are now a thing of the past.
However, that's not to say there aren't any bargains left in the market. Two stocks in particular that still look incredibly attractive are U.S. Bancorp (USB +2.61%) and Berkshire Hathaway (BRK.A 0.16%) (BRK.B 0.10%).
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This bank is usually expensive -- but it's not right now
U.S. Bancorp is usually one of the most expensive bank stocks in the market in terms of the share price as a multiple of its book value. And over the past decade, this has consistently been the case -- in the chart below, notice that the blue line (U.S. Bancorp) never crossed below any of the others until the COVID-19 pandemic set in.
USB Price to Book Value data by YCharts.
There's certainly a good reason for this. U.S. Bancorp is one of the most profitable and efficient banks in the United States. In 2019, U.S. Bancorp's 55.8% efficiency ratio was significantly better than those of most of its peers, and its return on equity (ROE) and return on assets (ROA) were among the best among any brick-and-mortar banks.
More importantly, U.S. Bancorp has a fantastic track record of responsible lending and solid financial management. In fact, during the 2008-09 financial crisis, U.S. Bancorp's earnings never went negative, something few banks can claim.
So, why has U.S. Bancorp been so beaten-down now? The short answer is that the COVID-19 pandemic has created a ton of uncertainty. We just don't know how long a recession will last, and there's no way to know if consumers will be able to pay their bills after government support stops flowing. And unlike most of its big-bank peers, U.S. Bancorp doesn't have an investment banking business (which tends to do well in turbulent times).
I've had U.S. Bancorp on my watch list for years, but valuation was always an obstacle. Not that it wasn't justified -- I just felt that there have been better values in the banking sector for most of the past decade. However, now that U.S. Bancorp is trading at its lowest valuation since 2009, I jumped at the chance to add this well-run financial institution to my portfolio.
Don't give up on the Oracle of Omaha
It might seem like investors are starting to lose faith in Berkshire Hathaway and Warren Buffett, especially since the company reported earnings on May 2. Since that point, the S&P 500 has gained nearly 6%, but Berkshire is essentially flat, rising by only 1%.
What's more, the only reason Berkshire has even done that well is because of the company's massive stock portfolio. The company's biggest investment, Apple (AAPL +2.65%) has risen by nearly 9% since Berkshire reported earnings, and other large stock positions Bank of America (BAC +0.75%) and American Express (AXP +1.75%) are up even more sharply.
The problem is with Berkshire's investment strategy -- or the perceived lack thereof. For most investors (myself included), one of the main reasons to own Berkshire is Warren Buffett's uncanny ability to make smart investments during market crashes. And to the surprise of Berkshire's shareholders, it turns out that Buffett and his team were net sellers of stock during the first quarter, ending with about $137 billion in cash on hand. When you add in the airline stock sales, which took place in April, the cash hoard could be getting close to $150 billion now.
While I certainly wished Buffett would have put more money to work near the March lows, I'd caution investors to judge Buffett slowly. The COVID-19 pandemic isn't over yet. For one thing, Buffett doesn't really want to spend Berkshire's cash on stocks -- he'd rather acquire entire businesses. And with the Fed and Treasury pumping trillions of dollars into the economy, businesses have had little reason to reach out to Berkshire for help.
Additionally, Buffett has a history of making savvy moves, but not always during the crisis. He's much more inclined to make investments after the dust settles. In fact, Buffett's most successful financial crisis-era investment (Bank of America) wasn't initiated until 2011 -- over two years after the market bottomed.
I've added more shares of Berkshire to my portfolio. Buffett now has nearly $150 billion to work with, and I'm waiting for the government's financial support to dry up before I judge Buffett's pandemic-era investment effectiveness. And if previous crises are any indicator, I'll end up glad I was patient.
Buy with the long term in mind
As a final thought, both of these are best suited for investors who have a long-term focus. If the economic effects of the pandemic take longer to play out than expected, both of these companies could experience significant short-term volatility. From a long-term perspective, though, this looks like an excellent entry point into two great businesses.
