Is Warren Buffett Giving Up On Bank Stocks?

We recently got our quarterly glimpse at what Berkshire Hathaway's (BRK.A 1.18%) (BRK.B 1.30%) stock portfolio looks like, and to say that there were some big surprises would be a huge understatement.

Perhaps the most surprising move is that Warren Buffett (who controls the bulk of the portfolio) decided to sell some of Berkshire's bank stocks. And not just one or two. Buffett sold all or some of no less than nine different financial sector positions. Buffett has been a big fan of bank stocks as an investment vehicle for a long time, and added heavily to some of Berkshire's bank investments in recent years.

These moves prompt the question: Is the Oracle of Omaha giving up on the banking industry?

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Buffett sold billions in bank stocks

First, here's a look at the bank and other financial stocks Berkshire Hathaway sold during the second quarter:

Data source: Berkshire Hathaway 13-F. Market values based on share prices as of Aug. 20, 2020.

Berkshire sold about $6.9 billion worth of bank and financial stocks during the second quarter. To be clear, that's the current market value of the shares sold -- we don't know the exact prices Berkshire received.

Some of these were profitable sales. For example, Berkshire's cost basis in Mastercard is about $41 per share, and the stock currently trades for more than $300. However, others -- such as the large quantities of Wells Fargo and JPMorgan Chase -- were likely sold at a significant loss.

It's also worth mentioning that aside from Goldman Sachs, Berkshire still owns a stake in all of these companies. But Berkshire clearly decided to pare down its positions, and by quite a bit in some cases. The JPMorgan Chase stake is now 61% smaller, while the PNC Financial and Wells Fargo sales represent reductions of 41% and 26%, respectively.

A big bank buy in the third quarter

What makes this more surprising is the news we learned about before the second-quarter 13-F filing was released. From mid-July through the first week of August, Berkshire spent more than $2 billion to add to its already massive Bank of America (BAC 3.35%) investment.

Now, Berkshire owns more than 1 billion shares of the banking giant, representing a stake of 11.9% of the outstanding shares worth about $26 billion. To be perfectly clear, the Bank of America stock purchases were made after all of the bank stock sales discussed in the last section. And Berkshire is allowed to own up to 25% of Bank of America if it wants to, so it's entirely possible the buying spree isn't over just yet.

Why does Buffett seem to prefer Bank of America to Berkshire's other bank stocks? We don't know for sure, but I'd have to believe valuation has something to do with it. After dramatically improving efficiency, asset quality, and profitability in the decade or so since the financial crisis ended, Bank of America trades for about 10% less than its book value.

On the other hand, JPMorgan Chase trades for a 26% premium to book and several others on the list are significantly above book value as well. Wells Fargo trades at a discount, but for a good reason. Meanwhile, Bank of America is a top-quality institution that's cheap.

The bottom line

If we were to just look at the snapshot provided by Berkshire's second-quarter 13-F, it might appear that Buffett is losing faith in an industry he's historically loved putting money into. However, the additions to the Bank of America stake indicate that Buffett might see a particularly strong opportunity in that specific bank stock and has shifted capital in that direction.

While a roughly $2 billion addition to the Bank of America stake doesn't even come close to offsetting nearly $7 billion in sales, it wouldn't be fair to assume Buffett is giving up on banks -- he just seems to be focusing on quality and value a bit more.