Buffett's Latest Investment and Some Financial Sector Earnings

Wall Street recently learned that Warren Buffett invested another $800 million of Berkshire Hathaway's (BRK.A 0.64%) (BRK.B 0.54%) capital in Bank of America (BAC 1.53%), and in this episode of Industry Focus: Financials, host Jason Moser and Fool.com contributor Matt Frankel, CFP, discuss what they know and what it could mean for investors.

Plus, the pair examines the latest results from American Express (AXP -0.08%) and Ameris Bancorp (ABCB 0.63%), and looks ahead to earnings from Markel (MKL 0.53%) and Mastercard (MA -1.19%) later this week. 

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.

This video was recorded on July 27, 2020.

Jason Moser: It's Monday, July 27th. I'm your host Jason Moser, and on this week's Financial show, we're going to dig into Warren Buffett's Bank of America crush. We've got a couple of earnings reports to get to with American Express and Ameris Bancorp. We've got a couple of stocks that we're watching this coming week.

Joining me, as always, it's the Certified Financial Planner. He's a year older, he's a year wiser, Mr. Matt Frankel. Matt, how is everything going?

Matt Frankel: Oh, not too bad from your friend down here, who's still in his late 30s. How is everything in Virginia?

Moser: [laughs] Yeah, it's a nice little thing to have. Everything is good. We're, you know, just keeping busy. It does seem like it's getting back to normal, somewhat, I mean, you know, people wearing masks and being a little bit more thoughtful of space and whatnot. But you can go do a lot of stuff, it seems like people appear generally doing OK. School is going to be starting out virtually for at least the fall semester. But you know, maybe that's the right decision, I don't know, I guess. You know, we'll figure out when we get there, but everybody is at least healthy and happy. How about you all?

Frankel: Yeah, same here. I mean, our day care; we actually never lost day care, which we're a big rarity. My kids go to a day care that's run by the hospital that my wife works at. So, they were never even able to close. So, the school thing, fortunately for us, is not really an issue to worry about. But I know here they're giving parents an option of in-person or online.

Moser: Yeah. They did. They actually -- Fairfax County in Virginia here is a very, very large county, and they let all of us vote, they let parents vote, would you want to do like an abbreviated being at school a couple of days a week or just do all virtual? And with close to 200,000 respondents, it came down, it was 60% voted for at least some physical time at school; 40% voted for just nothing but virtual. And when I saw those results, I thought, you know what, I think that's probably a little bit tighter than they were [laughs] hoping it would be. I think they were hoping for, like, a 75% one way or the other. So, they actually went, you know, a little bit against that decision and they decided to start things off virtually, at least. And figuring that, you know, you can slowly work our way back into it as the conditions improve. So, you know, we'll see. They're, you know, interesting times to say the least.

Interesting times for Berkshire Hathaway, too, Matt. Big headline last week, and you even wrote an article about this. The title of the article, "Warren Buffett Just Spent Another $800 Million on This Bank Stock," tell us what bank stock and why? What's going on here, Matt?

Frankel: Well, I mean, as a journalist, we want the headline to draw readers in. But $800 million actually isn't that big for Berkshire standards in the context of this bank stock; it is Bank of America. Bank of America, ticker symbol is BAC, for anyone watching at home, is Warren Buffett and Berkshire Hathaway's largest bank stock holding by a large margin, especially now.

So, what Buffett did, they bought about 34 million shares for an average price of just under $24/share, they did this last week. So, if you do the math, that works out to about $800 million they invested. This brought their stake in Bank of America up to 11.3% of the bank. To be clear, the only reason we know about this is because they're over that crucial 10% threshold. For example, if Buffett bought more of, say, Goldman Sachs right now, we wouldn't know.

Moser: So, over 10%, they have to announce that, like that's a regulatory filing that has to be...

Frankel: Yeah, it's a regulatory thing that they have to let us know right away. So, that's why we know about it. But anyway, the effect of it was, it brought the stake up to 11.3%. It was over 10% already. So, this wasn't a giant jump in ownership, but it does show that they're putting money to work and that they still believe very much in Bank of America. That's a big stake, it's worth about $24 billion right now. It's their second-largest investment of any kind; a distant second, I should say, the Apple investment is just huge. But other than Apple, Bank of America is Berkshire Hathaway's largest stock position. And so, an investment that big, I would have to believe that Buffett himself is behind it, not one of the other stock pickers.

Moser: Yeah, you'd figure. And I guess that was going to be one of my questions, given that this is such a large holding for him, and I mean he's got this portfolio of a lot of companies that he's held in there for a long period of time, in Coca-Cola, American Express, Wells Fargo -- I mean, Wells Fargo obviously has been plagued with its problems here. But you know, you look at Bank of America and how these banks have come out of this earnings season, certainly Bank of America strikes me as one that is not only doing well, but the market, I think, is giving it a little bit of credit there. I mean, it's a stock that is trading nicely above its tangible book value in an environment where we're seeing a lot of banks right now that are not necessarily witnessing that same good fortune.

Frankel: Sure, well I mean, one, it's still important to mention that it's way off the highs of the year. I mean, most banks are. Not only is the low interest rate environment, really, not conducive to profitability in banks, but, I mean, including Bank of America, all the big banks are setting aside billions of dollars in anticipation of loan losses. We just enhanced unemployment benefits just right now. And unemployment is still in the double digits in America. So, the combination of that could make a tough second half of the year for banks.

But at the same time, that mindset is driving the stocks down and creating long-term value for patient investors, which Buffett certainly is one of them.

Moser: Oh, yeah. And we'll talk about this a little bit more when we get into Ameris' most recent quarter, but also we won't neglect the possibilities and likelihoods of consolidation out there. I mean, there will be some more acquisitions here. You have to figure that, you know, some of these banks that are out there trading at below tangible book value, they start looking like some attractive investments out there. And certainly, Ameris made a mention of that on their call.

Yes, so when you look at Berkshire Hathaway going forward, I mean we've talked a lot about this over the last several years, it's just always seemed kind of odd that Buffett has been so clearly OK with Wells Fargo to date and what Wells Fargo has been doing, even though it doesn't [laughs] really feel like Wells Fargo has been doing a very good job. I mean, do you feel like -- I mean, it seems like maybe Bank of America is taking over that position as maybe the bank that Berkshire Hathaway wants to be best known in cahoots with, [laughs] so to speak.

Frankel: Yes. But, I mean, it's still worth mentioning that Berkshire, combined with Warren Buffett personally, because he owns some Wells Fargo in his personal stock portfolio, owns just under 10% of Wells Fargo. So, I wouldn't completely say that Buffett has lost faith in Wells Fargo, but it definitely seems that Bank of America has become his favorite bank stock. It's worth mentioning that -- I said earlier that the reason we know that he just bought a lot of Bank of America is because of the 10% thing. So, if you look at some of the other bank stocks in Berkshire's portfolio, the stakes are a lot less than 10%, like for example, Berkshire owns 1.9% of JPMorgan Chase, 2.2% of PNC Bank. So, this isn't to say that Bank of America is the only bank stock that Buffett is buying.

And in the past, when he's been buying one, he's been buying the other ones as well. A few quarters ago, I think he bought something like 10 different bank stocks. So, I wouldn't be surprised at all to see that he spent a lot of money to increase the JPMorgan stake, increase the PNC stake. Maybe he bought some more Wells Fargo, because he had sold some, now it's cheaper, maybe he bought a little more, I wouldn't be shocked. So, I wouldn't be surprised to see that Berkshire is finally starting to deploy some capital.

If you remember last quarter, investors were kind of disappointed when we got the earnings results that Berkshire was a net seller of stocks during the first quarter. And it kind of makes sense if you think about Buffett's mentality. I mean, for the most part, January and February were pretty normal months in terms of the economy and the stock market. I mean, the all-time highs were reached in February. So, March was really the "big opportunity," I guess, when we saw the market kind of plunge.

But at the end of the first quarter, at the end of March, it was still pretty chaotic. You know, the CARES Act hadn't been passed yet, or it hadn't been signed into law yet or totally implemented yet; I can't remember which. But you know, the stimulus checks didn't start going out till April. So, we really didn't have clarity as to where the economy was going and how bad the pandemic was going to get by the end of the first quarter. Buffett hates investing into panics. He likes investing after the panic has already kind of happened and the market is down. I mean, we're talking about Bank of America, that's considered one of his best financial crisis-era investments, that wasn't made till 2011. So, I mean, he didn't invest in Bank of America during the '08 panic, when he could have got it even cheaper, he waited till the dust settled and he found a good value and he invested. So, maybe that's what's happening now, and Buffett has finally just kind of -- now, that things have, kind of, stabilized, I guess you'd say, especially compared to March, we're seeing Buffett put a little bit more money in.

Moser: One more thing before we move on to American Express, just wondering about your opinion on this, given the status of Bank of America and Berkshire's world today, how much do you think that is due to Brian Moynihan? I mean, as the CEO of Bank of America, you know, he's been there for a while now, clearly knows what he's doing. Wells Fargo, it's the other side of the coin, right, just managerial crisis. And hopefully, Mr. Scharf is able to get that under control there. But clearly, it seems like Buffett is making his choice here.

Frankel: I mean, there's no argument you could make where Moynihan has done a bad job at Bank of America. I mean, I'd rank in the top two big-bank CEOs, Jamie Dimon being -- you know, those could go either way. But given what Moynihan was dealt -- the hand he was dealt after the financial crisis, the improvement in Bank of America in terms of efficiency, in terms of asset quality, in terms of getting rid of non-core assets, has just been incredible. I mean, before this, before the pandemic started, Bank of America's profit numbers were something you would've considered crazy a few years ago. Like, if I had told you they would be producing a double-digit return on equity, if I told you that [laughs] right after the financial crisis, you would have told me I was nuts. And they've been doing it for several years before the pandemic started, because of Brian Moynihan's focus on efficiency and closing underperforming branches and embracing technology.

Bank of America has won a ton of technology awards. We talk about Square and PayPal and fintechs like that, Bank of America's technology, you know, the recognition they've gotten for their technology has been just on par with any of the fintechs, and a lot of people don't realize that. So, that's been a big part of their efficiency. So, they've done a great job just all around.

Moser: Yeah, it really does feel like that. I mean, yeah, you make a great point there. He was dealt a really, really difficult situation. So, I mean, if anything, maybe for Wells Fargo shareholders, Bank of America is proof that it can be done. I mean, we were giving Bank of America a hard time several years ago. So, to see that those turntables have turned, [laughs] as Michael Scott might say, you know, you never know. Maybe there will be better days ahead for Wells Fargo.

Let's take a look at another one of your favorite companies out there. I know you like this company a lot. We've talked about it before as being potentially an addition to a war on cash Part Deux, but right now it's still on the outside looking in, American Express earnings, not the greatest year so far for the company, certainly understandable, I mean, it is a bank after all, too. But what stood out to you in the quarter?

Frankel: Well, first, let me just go over, kind of, the gloom-and-doom numbers of the situation. Profits were down 85% year over year, which, I was actually impressed they were still profitable; a lot of banks weren't. [laughs] Revenue dropped 29%. People just weren't -- I mean, you know American Express' slogan, "Never leave home without it." Well, people couldn't leave home at all, [laughs] so they couldn't really do a whole lot with their credit cards.

And when you think about -- I mean, do you have an American Express card, Jason?

Moser: I do. I am a proud card member, I guess, as they would say, for, I don't know, probably 15 years now or something.

Frankel: So, you understand that most of their perks are travel-oriented.

Moser: Yes. Yes, I do.

Frankel: And no one was traveling [laughs] in the first half of this year for the most part. But American Express, what stood out to me, and this isn't really part of the earnings report, I'll get to more of the gloom-and-doom numbers in a second, but American Express, really to me, just did a great job pivoting. When you think of -- you know, a lot of credit card companies gave people, you know, an extra percent back in rewards on groceries or something like that for the pandemic. American Express really pivoted their benefits entirely. My American Express card, I now get a $20 statement credit for having my streaming services billed to the card. A $20 monthly statement credit for having my mobile phone bill billed to the card. And that's on top of the other benefits that I -- and the rationale with that is, because I wasn't able to use my travel benefits, so they gave me something -- my business AmEx. I have the business version of the Delta card, they gave everybody a $75 loyalty credit, just a statement credit for $75 out of the blue.

So, they're doing a great job of customer retention. I have to believe that a lot of people canceled credit cards during the pandemic, especially ones with annual fees. You know, if you can't go out and use the benefits, what's the point of paying a fee for it? So, they did a great job. I think you're going to see great consumer retention numbers.

But year over year their credit card balances are down 36% at the end of the second quarter. That's a pretty big -- and that's balances, that's not just activity, that's -- because remember American Express is, at its heart, primarily a charge card company, not a carry-your-balance credit card. I mean, the AmEx Platinum is a charge card, you pay your balance every month for the most part. There are some pay-as-you-go options. But so, that's really hit them in terms of outstanding balances and things like that.

American Express, they built their loss reserves by almost $630 million during the quarter. But when you look a little deeper, that assumes that reserve build is assuming about a 10% unemployment rate at the end of this year, which I think might be a little bit of a stretch. It's assuming a 1.7% GDP drop in the fourth quarter of this year, which most experts are expecting the economy to rebound, especially by the fourth quarter if not in the third. So, the point is that that's a loss reserve, that's not based on actual losses that they've had. And that's reflected in their profitability numbers.

And we saw this at the end of the financial crisis, some banks overestimated their losses and eventually they released those reserves and they got counted back as earnings in the end. So, this isn't necessarily lost money. We still have to see how this plays out. The banks, including AmEx, are being cautious. Like I said, they've done a great job of cutting costs. The stock is still down over 20% year to date. I've been a shareholder of AmEx since before I was a cardholder of AmEx. It's one of the first stocks I bought. And I still hold it and I think it's a good value. And I think that the company is one of the most overlooked fintechs.

Moser: You know, I tend to agree with you on this, it does seem like it's overlooked in the sense that people think it's just sort of an old-school type of company in some ways, but it absolutely has one of the strongest brands out there that I can really think of. And, you know, I mean, I don't know, maybe it's not their secret sauce, but it's certainly something that really separates them is, their focus on the customer experience and customer service is really, really strong. I mean, it is one of those things that's a noticeable difference. I mean, they just have a different level, it seems like, of customer service. And maybe that is something that keeps people with them even if they're not spending. I mean, those credits, whatever it may be or waiving in an annual fee, whatever it may be, they just have a knack for doing that kind of stuff, and that does resonate with consumers in tough times like these for sure.

Frankel: Yeah. Like I said, they've just been really -- and they were focusing on the millennial group, that's kind of the streaming credit is, I think, that's, kind of, to replace the Uber credit, if you remember AmEx rolled that out, people can't use the Uber credit for the most part right now. I actually used mine this month. [laughs]

Moser: Oh, really?

Frankel: Yeah, I was up your way in Maryland, and I actually used my Uber credit for the first time this year.

Moser: Was that when you were out there gambling with Dan Kline?

Frankel: I was not. Dan Kline was nowhere to be found. And my wife has a sister that's 20 years younger and just got her driver's license, and we helped her get a car and I had to drive it up there. She lives up that way. So, I was up there, and then I had to Uber back to the airport. So, [laughs] I got to use my Uber credit.

But anyway, so the streaming credit was really to replace that for millennials. And they're doing a great job of just, kind of, thinking outside the box. Like you said, a lot of other credit card issuers are, you know, boosting their grocery reward rate from 2% to 3% or something like that. But you know, a benefit like, "OK, get a streaming service, it's on us," that's something that's really outside the box, and I think that really resonates with the younger generation, especially who doesn't really think in terms of cash back, they want perks, that's what you're paying for. You know, I'm not paying $500/year for my Platinum card for the cash back rate, I'm paying for the benefits that come with it that I'm currently not able to use. So, they're really doing a great job of still creating a value proposition for their credit cards. And I think that's really going to pay dividends over this year.

Moser: Good deal. Well, this morning Ameris Bancorp also released their second-quarter earnings report. And Ameris, that -- just a small little Georgia bank, right, it was based out of Monterey, I think they're based out of Atlanta now with the Fidelity acquisition being all taken care of. But a small-cap bank that has done, I think a really [laughs] good job, particularly in a very difficult time. I mean, we've talked a lot about the challenges with bigger banks in this interest rate environment.

You know, frankly, smaller banks, I think it's an even steeper uphill climb, because they're smaller and they don't have necessarily the same resources, but when you look at Ameris, what they continue to do, total assets up just a skosh under $20 billion. Now, total deposits of $15.6 billion, that was up from $14 billion at the end of 2019. It's important to note, and we talk about this every quarter, because it really matters, particularly these days, net interest margin actually expanded for the quarter, like, 13 basis points. I think expanding anything in this environment is probably worth writing home to. But I think it's important for them to note that part of the Fidelity acquisition, part of their philosophy is trying to make sure that noninterest-bearing deposits continue to be a substantial portion of their deposit base, right. That brings the expenses on those deposits down. The noninterest-bearing deposits made up 36% of total deposits this quarter; that's up from 30% from a year ago. So, I mean, you know, that is a way to really help combat the difficult interest rate environment, when you're not really making much on the money that you're lending out.

Frankel: Yeah, you'll really see that come into play when interest rates start to rise again. Because if they're still, you know, they're essentially borrowing money at 0%, in a noninterest-bearing deposit, and then as the amount they can make from loans goes up and up and up, the noninterest-bearing deposits really make a great profit spread.

Moser: Oh, yeah, absolutely. And I mean, you know, we talked about it with American Express and with all of the other banks, I mean, talking about these credit losses, these reserves that banks are putting forward to try to deal with this. I mean, Ameris, they've had a lot of the Paycheck Protection Plan lending going on. I mean, you know that has its puts and takes, it's not like it's some big profitable endeavor, but I mean, they're being a part of the solution, right? And that really is something where, you know, if you're a bank that's being seen as a part of the solution, you typically are going to emerge from a situation like this being a little bit stronger.

But when you look at the reserves that they're putting aside for potential losses. I mean, they recorded another $88.2 million this quarter compared to $41 million just in the first quarter. So, if all in total, if you look at the $130 million or so that they put aside so far, that's about 0.65% of their total assets. Now, the only reason I'm bringing this up is because I thought it would be interesting to take a look at a big bank and say, "OK, what kind of percentage of those total assets does it look like for Wells Fargo?" You know, they total about $20 billion right now on reserves for the year. And that's about 1% of their total assets. So, I mean, Wells Fargo, obviously a big bank, tremendous balance sheet, lots of assets, but you know, that's a company that's had a little bit of a tough time here and some self-inflicted injuries, and they've had to reserve a good bit more. So, it seems like, you know, Ameris' ratios, efficiency, all that stuff, they continue to run a tight ship, and that, for me, I think is really, really encouraging for shareholders.

The thing that stood out to me, though, Matt, in the call -- and you know, they just got done with this Fidelity acquisition; that was about a $750 million acquisition. But given the conditions in the banking space today, some of the valuations that are out there, you know, it could be argued there probably are some opportunities, and the questions of mergers and acquisitions are brought up on the call. And it sounds really [laughs] like the Ameris team is ready to get back to it. And they are looking, generally speaking, in that same geographical area, but I was really impressed with the target. They were saying that they can expect a deal from anywhere of $2.5 billion and up. Which I mean, really, you know, the Fidelity, that was a big deal for them. So, you're talking about something they're targeting now being considerably larger than that deal. I mean, while the bank is, kind of, trying to bide its time here, in this low interest rate environment, we forget sometimes they can grow via acquisition. It sounds like that might be, you know, on the horizon here for Ameris and they have a good track record of doing good deals to this point. So, you know, I don't know, cautiously optimistic, I guess.

Frankel: Yeah, I mean, I thought Ameris' quarter was pretty impressive. Their mortgage business, especially, was one that really stood out to me. The mortgage business is up $70 million quarter over quarter. You know, people are really taking advantage of the low mortgage rates and for a small bank, that's an impressive [laughs] number.

Moser: It is, yeah, and it sounds [laughs] like they may be getting bigger sooner or later, so we'll continue to keep an eye on it and, you know, continue to cover it here on the show.

OK, Matt, before we wrap it up this week, let's jump into earnings season here and give our listeners a stock that we'll be watching this coming week. What is a stock that you'll be watching?

Frankel: I am watching Markel; that's one that I mentioned a lot. That's the position I've added the most to during the pandemic. So, I'll tell you that much. I'm watching their insurance profitability. We mentioned before on the show that we really don't know what the pandemic is going to do to insurers in general. Markel was unprofitable insurance-wise last quarter, their investment portfolio didn't do particularly well. So, I'm keeping an eye on Markel's earnings. The stock has run up pretty good lately. I'm watching for signs that that valuation is justified. And I'm, you know, crossing my fingers and hoping that it is, so. What are you watching?

Moser: Yeah, that's one I own, too, and I like it a lot; I'll keep an eye on that one. But I'm going to watch out for another one that I own, Mastercard. Ticker is MA. Earnings are out on Thursday for Mastercard this week. Busy week, and Thursday is the day for Mastercard, really, you know, I'm just kind of -- based on what we were talking about with American Express and all these banks, I'm interested to see how the big dogs in the payment space are really handling what's going on? Because, you know, Mastercard and Visa, we talk about it all the time, not banks, right, they're not lending the money, little bit of a different business model there. So, their exposure is certainly tied more directly to consumer spending, but that's a really attractive high-margin business and I'll just be interested to see what they're seeing? Yeah, what their experience has been these last several months, and kind of, see if they have any ideas how the rest of the year is shaking out? But, yeah, another one that we like here, and one that I own and will continue to own, because, hey, Matt, you know that war on cash, it's real, it's real, man.

Frankel: [laughs] For sure.

Moser: That's going to do it for us this week, folks. Remember you can always reach out to us on Twitter @MFIndustryFocus; you can drop us an email at IndustryFocus@Fool.com. We always love hearing from you.

Matt, I appreciate you taking the time out of your schedule this week to join us, as always. Glad to hear you had a nice birthday, and hey, let's make this the best year yet, how about that?

Frankel: I hope so. As soon as 2020 is over, and it's going to get better. I think 2021 might be my best year yet. I don't want to call 2020 my best yet.

Moser: [laughs] Well, we'll just continue to check in week by week and see how things are?

Frankel: That's not setting the bar very high. [laughs]

Moser: All right, Matt, well, look forward to catching you next week.

Frankel: All righty.

Moser: As always, people on the program may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear.

A big thanks to Tim Sparks for making all of this happen for us each and every week. For Matt Frankel, I'm Jason Moser, thanks for listening and we'll see you next week.