Financial Associated Press (Shanghai, editor Huang Junzhi) According to data, Wells Fargo (NYSE: ) (Wells Fargo & Co.) stock returned a total return of 61% last year, surpassing Berkshire Hathaway (NYSE: ) ) (Berkshire Hathaway Inc.) performance of any stock in the portfolio as of September 30 last year. It also far outperformed the company’s two biggest bets: Apple Inc and Bank of America.
Buffett’s Berkshire will reveal an update on its holdings in the coming days. Its filings have already shown that the company has largely missed a good chance for a rebound in Wells Fargo (NYSE: ).
For years, Wells Fargo has been the largest stock bet in Berkshire Hathaway’s stock portfolio by market capitalization, often lauded by Buffett himself. But with the bank mired in scandal, Berkshire had cut its stake to about 675,000 shares by September from 323 million at the end of 2019.
Shares of Wells Fargo rallied last year on signs that Chief Executive Charlie Scharf’s efforts to turn around the bank are making progress.
Scharf and his team cleared some key regulatory hurdles, and full-year profits surged more than 10-fold last year after a sharp drop in 2020. While Wells Fargo has also suffered what it called a “failure” on the regulatory front, the bank is third in 2021 among the 24 large U.S. banks in the KBW Bank Index, up from bottom a year ago.
“This is the first time Wells Fargo has produced a return in a long time,” said Edward Jones Investments analyst Kyle Sanders, who has recommended buying the stock since 2018.
“There is a heightened sense of urgency to address regulatory issues, and they say they will cut costs and expenses – and they do.”
But for Buffett, the process came too slowly. His exit began in 2017, a year after the scandal began, and then accelerated during the pandemic.
David Kass, a professor of finance at the University of Maryland’s Robert H. Smith School of Business, said the reduction likely reflects Berkshire’s rethinking of its bank exposure amid the coronavirus pandemic Turning to Bank of America in part because of disappointment at the speed with which Wells Fargo was cleaning up its legacy.
Buffett has “very high ethical standards” when it comes to stock picking, Kass said. Buffett also hinted at other considerations.
In 2019, when Wells Fargo ( Wells Fargo ) in its search for a new chief executive, he warned the bank against picking people from Wall Street. Ultimately, Wells Fargo’s board chose Scharf, who formerly ran Bank of New York Mellon Corp. and was JPMorgan’s Jamie Dimon’s deputy.
Replacement of investment targets in the financial sector
Berkshire withdrew from some financial firms in the wake of the outbreak, trimming stakes in Goldman Sachs Group Inc. and JPMorgan. Its exposure (at cost) to banks, insurers and other financial firms fell from about 37% at the end of 2019, before the Covid-19 crisis, to about 26% at the end of September.
While Wells Fargo’s stock has risen the most among Berkshire’s common stock portfolio, the impact on Berkshire has been minimal. If Berkshire’s investment in Wells Fargo remains unchanged from last September, Berkshire’s stake in Wells Fargo would be worth $32.4 million by the end of 2021. Meanwhile, Apple stock’s total return last year was nearly 35%, valuing Berkshire’s stake at $157.5 billion.
Additionally, Bank of America remained Berkshire’s second-largest common stock investment as of September, with the stock returning nearly 50% last year. Buffett has publicly expressed his admiration for Bank of America CEO Brian Moynihan, calling him “the most undervalued bank executive in America.”
Overall, Buffett “likes financial stocks, he likes banking, he knows a lot about it,” Kass said. “From an investment perspective, he’s backing Bank of America.”