Famed investor Warren Buffett and Berkshire Hathaway (BRK.A +0.01%) (BRK.B 0.24%) went negative on bank stocks in the second quarter. We learned last week in Berkshire's quarterly 13F report that the conglomerate didn't add to any of its financial stocks in the second quarter. It decreased its stake in most bank stocks, including huge reductions in JPMorgan Chase and Wells Fargo. The company also eliminated its position in investment bank Goldman Sachs and cut its smaller stakes in several regional banks and digital payment companies.
While 13F reports can be great tools for investors, they often do not present the whole picture because they do not say exactly when each move was made, and they are typically reported more than a month after the quarter ends. For instance, Buffett and Berkshire could have made these moves in April or May, when many areas were sheltering in place as a result of the coronavirus pandemic. Despite the Oracle of Omaha's stock sales in Q2, there is already reason to believe he's feeling much better about the banking sector as a whole. Here's why.
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Buffett is bullish on Bank of America
If you follow Buffett, you know that Berkshire plowed more than $2 billion into Bank of America (BAC +0.22%) in July and now controls close to 12% of outstanding shares in America's second-largest bank. Buffett was required to report these moves in July because any entity that owns more than 10% of a company's outstanding shares must disclose moves made on that stock right away.
The move on Bank of America is a reversal from Buffett's second-quarter 13F, which reports moves made from April 1 to June 30. In the second quarter, Buffett did not change his position on Bank of America, maintaining the same share count. The company didn't begin buying the stock again until July 20, according to SEC filings, which happens to be four days after Bank of America reported second-quarter earnings. And while down year over year, those earnings were better than expected, with the bank generating a $3.5 billion profit after setting aside more than $5 billion to cover future expected loan losses. This could suggest that the positive earnings report in such a difficult quarter completely changed Buffett's view on Bank of America.
Will Buffett be bullish on other banks?
Like Bank of America, the majority of banks beat their earnings expectations in the wildly unpredictable second quarter. While this does not mean the sector is out of the woods -- far from it -- the industry still achieved this while setting aside lots of cash for future potential loan losses and in a low-rate environment. This might have changed Buffett's view on the industry.
It's also important to note that in addition to Bank of America, Berkshire in the second quarter also maintained its position on American Express, Globe Life, Moody's, StoneCo, and Synchrony Financial, and only slightly reduced its position in U.S. Bancorp. Aside from U.S. Bancorp, these companies aren't traditional banks (or aren't banks at all), so even if Buffett is bullish on banks again, it may not apply to this group.
But where Buffett's new perspective on Bank of America may apply is to a bank like JPMorgan. Perhaps the biggest surprise in Berkshire's 13F was that the company cut its stake in JPMorgan by nearly 62%. Not only does Buffett have a good relationship with JPMorgan CEO Jamie Dimon, but the bank also performed better than its peers in the Great Recession and appears to be doing the same thus far in the coronavirus pandemic.
JPMorgan had an impressive second quarter, generating a profit of nearly $4.7 billion while setting aside nearly $10.5 billion to cover potential future loan losses. The bank did this while generating record revenue, driven by record trading revenue. As I've written recently, I do think Bank of America has a safer overall portfolio and a safer dividend, but I still think that if Buffett was impressed with Bank of America's second-quarter performance, he was equally or even more impressed with JPMorgan's, leading me to believe that it would not be out of the question for Buffett to increase his stake on JPMorgan in July.
Don't rule it out
Despite Buffett's clearly pessimistic view of the banking sector in the second quarter, his huge buy of Bank of America in July indicates that he and Berkshire in this type of fluid environment can change their views quickly. Buffett hasn't been overly critical of the banking industry and even said at Berkshire's annual meeting in May that the banks didn't worry him. It will be very interesting to see if in the third quarter he changes his positions on any of the banks or other financial stocks in his portfolio. I would also continue to watch his moves on JPMorgan to get a broader view of how he is thinking about the banking sector overall.
