Berkshire Hathaway (BRK.A -0.54%) (BRK.B -0.38%) recently filed its 13F form for the first quarter of 2021, detailing what stock sales and purchases the conglomerate and the legendary investor in charge, Warren Buffett, made during the period. As has been the case for most of the past year, Buffett was active in the financial sector, mostly reducing Berkshire Hathaway's positions in banks. At the company's annual investor day earlier this month, Buffett provided some explanation for all the stock selling he's done in that sector.
"I like banks generally," he said, "I just didn't like the proportion we had compared to the possible risk if we got the bad results that so far we haven't gotten."
Let's review the three big changes Buffett and Berkshire Hathaway made to their bank holdings in the first quarter.
1. All but eliminating Wells Fargo
Everyone knew it was coming, but Buffett all but made it official last quarter, nearly eliminating his position in his onetime favorite bank, Wells Fargo (WFC 0.95%). Berkshire Hathaway sold 51.7 million shares, dropping its stake to a mere 675,000 shares valued at $26.3 million.
This essentially ends what was an epic run for the Oracle of Omaha and Wells Fargo. Buffett first purchased shares in the large U.S. bank in 1989, and by 1994, he had acquired more than 13% of its outstanding shares. At the end of the third quarter of 2019, before the pandemic, Buffett's stake, which had a rough original cost basis of just below $9 billion, was worth close to $20 billion. And at one point back in 2017, it was reportedly worth as much as $29 billion.
But as the fallout of Wells Fargo's phony accounts scandal and other revelations about its consumer abuses continued to play out, Buffett began to lose faith in the institution and started trimming his position. It looks like Buffett ultimately ended up making much less on his Wells Fargo investment than he could have, considering he sold more than 323 million shares between the end of Q1 2020 and the end of Q1 2021. During that 12-month period, the bank's shares traded from a low of $21.45 to a high of $39.07. At the end of 2019, they traded north of $53.
The stock closed at $45.73 on Thursday, and many investors still believe Wells Fargo is undervalued these days, trading at 135% tangible book value (equity minus intangible assets and goodwill). Bank valuations have shot up in recent months, and Wells Fargo in particular could see more tailwinds when the Federal Reserve lifts the $1.95 trillion asset cap that the bank has been operating under since 2018.
2. Dumping Synchrony Financial
Last quarter, Berkshire Hathaway also eliminated its entire stake in the consumer finance credit card company Synchrony Financial (SYF 1.07%), selling its 21.1 million shares. Synchrony uses what it calls a "partner-centric" business model under which it teams up with leading retailers and digital brands that promote Synchrony's credit cards. Consumers can get deals on specific purchases by opening Synchrony credit cards, which are often branded under a retailer's name.
While I wouldn't say I saw this move coming, it doesn't entirely surprise me. Over the last year, Buffett has become even more selective about which banks he wants to own. He seems to be picking a winner or two in each banking industry subcategory -- for instance, he sold his stake in America's largest bank, JPMorgan Chase, and loaded up on America's second-largest bank, Bank of America.
Considering that Buffett already has a huge position in American Express, and loves the brand, that is likely going to be his pick for a credit-card-focused holding. Berkshire Hathaway likely made a good profit on that Synchrony investment, though, considering that the stock hit its highest level ever during Q1.
3. Trimming U.S. Bancorp again
Berkshire Hathaway also sold about 1.45 million shares of U.S. Bancorp (USB 2.02%) in the first quarter -- but it still owns nearly 129.7 million shares. The Oracle of Omaha has sold small quantities of shares of the Minnesota-based regional bank a few times over the last year, and it's a bit unclear why. It does appear that he has made U.S. Bancorp his regional bank pick, though. He sold off his other regional bank holdings, including his stakes in PNC Financial Services Group and M&T Bank, in the fourth quarter of 2020.
One possible explanation relates to Buffett's well-known desire to keep his stakes in those banks below 10%, so he can avoid the additional reporting requirements that a higher ownership level would trigger. At the end of the first quarter, Buffett owned about 8.7% of U.S. Bancorp's outstanding shares. So his stock sale may have simply been a move to prepare for the bank's planned share repurchases, which should accelerate later this year. Last quarter's adjustment should maintain Berkshire Hathaway's stake at a level comfortably under the 10% threshold, even after U.S. Bancorp's total share count is reduced.
Overall, I still feel confident that Buffett plans to stick with U.S. Bancorp, although I will continue to watch his moves in upcoming quarters to see if he further reduces his stake in it.