Welcome to Episode #119 of the Value Investor Podcast
Every week, Tracey Ryniec, the editor of Zacks Value Investor portfolio service, shares some of her top value investing tips and stock picks.
The hedge fund and investment managers, including Warren Buffett’s Berkshire Hathaway, recently filed their 13F filings for the third quarter 2018.
This is where we find out what stocks they’re buying or selling in the quarter.
Berkshire Hathaway had a few surprises in the quarter.
One of them was the big bet on the banks.
Big Stakes in the Banks in the Third Quarter
1. JP Morgan Chase (JPM - Free Report) was added to the Berkshire portfolio for the first time with a $4 billion purchase. JPM is cheap. It trades with a forward P/E of just 11.7 yet is also expected to see double digit earnings growth this year.
2. PNC Financial (PNC - Free Report) was also a new addition. Buffett bought $829 million, for a 1.3% share. PNC is also cheap with a forward P/E of 12.6. It pays a dividend yielding 2.8%.
3. Bank of America (BAC - Free Report) has been in the portfolio for numerous years but in the third quarter, Berkshire added $5.8 billion to its stake. It’s Bank of America position is now worth over $25 billion. It trades with a forward P/E of only 10.8.
Should You Follow Buffett’s Lead?
Value investors are asking themselves if they shouldn’t get into the banks as well. They are cheap and have solid fundamentals, especially as the Fed continues to raise rates.
But because of Berkshire’s sheer size, it’s limited as to what it can buy. It shouldn’t be a surprise that Berkshire now owns 3 out of the 4 largest US banks. Citigroup is the only one it doesn’t own.
It basically doesn’t have much other choice. It’s too big to buy stock positions in the smaller banks and still use its cash.
It’s $4 billion purchase of JPMorgan stock could have bought 4 to 10 smaller banks outright but then Berkshire would have to deal with all the regulatory issues involved in running banks.
If investors want to emulate Buffett’s moves, they shouldn’t forget to take a look at smaller banks. Smaller banks are where the growth is.
Buffett can’t buy small and mid-cap stocks, but you still can.
2 Banks Buffett Wishes He Could Buy
1. Comerica (CMA - Free Report) is headquartered in Texas but also has a presence in other states, including Michigan. It has a market cap of $13 billion. Earnings are expected to rise 51.3% in 2018 and another 12% in 2019. That’s over 63% earnings growth in just 2 years.
2. Western Alliance Bancorporation (WAL - Free Report) is a $5 billion regional bank in Arizona and other western states. Earnings are expected to rise 31.9% in 2018 and another 11.9% in 2019. The insiders have been buying up shares as the stock has weakened. Shares are down 16% year-to-date.
Investors shouldn’t totally rule out the community banks either as these small banks will likely see the biggest growth.
But how do you find good quality community bank stocks?
Find out the answer to this, and all your pressing questions about investing like Buffett, on this week’s podcast.
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