Legendary investor and Berkshire Hathaway (BRK.A 1.65%) (BRK.B 1.53%) CEO Warren Buffett followed up a big sell-off of bank stocks in the second quarter by again selling a portion of his bank holdings in the third quarter. Notably, Buffett sold off almost his entire stake in JPMorgan Chase (JPM 1.52%), America's largest bank, reducing his position in the second quarter from 22.2 million shares (valued at more than $2 billion) to less than 1 million shares worth about $93.1 million.

At the end of 2019, Berkshire owned more than 59 million shares of JPMorgan valued at nearly $8.3 billion. The Oracle of Omaha has really fallen out of love with the bank. Should you?

Let's take a look.

JPMorgan Chase

Image source: JPMorgan Chase.

There's a lot to like about JPMorgan

Buffett has earned his reputation as one of the best investors of all time and I am sure he has his reasons for ditching JPMorgan Chase stock. But I don't agree with Buffett on this move and still think the $3.2 trillion-asset JPMorgan is a tremendous stock to own with plenty of upside potential still in it.

In Q2 2020, after U.S. gross domestic product (GDP) declined on an annualized basis by more than 33%, JPMorgan Chase turned a profit of nearly $4.7 billion. A quarter later when banks rebounded, the bank turned a profit of $9.4 billion, which is actually better than what the bank did in the fourth quarter of 2019 in a much better economy. While the financial sector is not out of the woods yet, this was an incredible performance in such a hard-hit economy. Although loan losses have not materialized like they normally would in this kind of recession thanks to plenty of government intervention, JPMorgan and other banks have still been significantly adding to their reserves to plan for potential losses. So, they have felt some sting in their earnings.

The bank has really demonstrated the strength of what CEO Jamie Dimon refers to as its "fortress balance sheet" that can produce solid and consistent earnings in any type of economy. When the economy is healthy, the consumer and community bank is typically the most profitable division, as the bank profits by making credit card loans, auto loans, and mortgages to financially healthy consumers. But when a recession comes through, and credit tightens and consumers retreat, the investment banking division steps up to help businesses through times of volatility, and profits from sales and trading activity.

Buffett's sharp reversal on JPMorgan comes after he praised the bank's business and Dimon for his strong leadership and intelligence. Berkshire first took a stake in the bank in 2018. During an interview with CNBC, Buffett was asked why the company had decided to invest. "Well, the better question is, why we were so dumb about not buying it earlier?" he said. "And the answer, I was dumb not buying it earlier."

During the same interview, Buffett suggested that a bank like JPMorgan should trade at three times tangible equity with the types of returns it was producing. JPMorgan currently trades around 182% of tangible book value.

Perhaps Buffett is worried more about the U.S. economy as a whole because banks are extremely closely linked to the economy, so if there is a much slower economic recovery, banks may certainly struggle as a result. With the Fed promising to keep rates low for the foreseeable future, banks will also see their interest income on loans reduced, challenging revenue. But this still doesn't completely add up to me because Buffett has significantly added to his Bank of America (BAC -0.34%) position, and maintained his position on other banks like U.S. Bancorp (USB 4.55%).

JPMorgan still has plenty of opportunity for growth

On JPMorgan's third-quarter earnings call, Dimon noted, "We're able to handle low rates, and we can have decent returns at low rates." The Fed has kept interest rates low since the Great Recession of 2008, with the benchmark lending rate getting as high as 2.5% in 2019. Yet JPMorgan has managed to increase earnings and get bigger in virtually every way.

Despite the current environment for banking, I see several tailwinds for JPMorgan's business. Regulators have prevented large banks like JPMorgan from buying back stock and increasing its dividend for most of 2020. As soon as these limitations are lifted, I believe Dimon will begin doing both of these things, and there is a chance it will happen as soon as the first quarter of next year. The bank has also set aside close to $34 billion to cover future potential losses on loans. That number is based on the assumption that there will be no second round of stimulus and on some harsher economic scenarios that may not end up happening. So far, bankers have been amazed at the lack of loan losses they have seen. Although things could certainly get worse, if they don't, JPMorgan could end up releasing billions of reserves back into its earnings that will help drive profits in quarters down the line.

Other areas I see potential for JPMorgan are in its retail banking franchise and its asset management group. There are still many local markets that JPMorgan has only just begun to build its retail presence in. The bank only launched its first retail branches in Boston, Philadelphia, and Washington, D.C., within the last few years. With its superior technology, brand, and banking expertise, JPMorgan should have no trouble stealing market share, bringing in more low-cost deposits, and finding new lending opportunities.

Also, the firm's asset management division has been doing well and Dimon said on the third-quarter earnings call that the bank "would be very interested" in participating in industry consolidation. In other words, JPMorgan would be open to buying one or maybe more asset management firms. If done right, that could help drive more non-interest income and further diversify JPMorgan's revenue mix.

What's good for Warren Buffett isn't necessarily good for you

Warren Buffett knows how to invest, so you can never completely write off his moves or decisions. But remember, Buffett and his team are managing a $245 billion investment portfolio, so his decisions have much bigger implications, and are often made for different reasons than the average stand-alone investor. In this case, I see lots of potential value in JPMorgan's stock for the individual investor and think there are still good returns to be made.