Berkshire Hathaway has been fueling its bank holdings over the past year and is now among the five largest shareholders in several including Bank of America, JPMorgan Chase and Goldman Sachs, according to a recent article in The New York Times that outlines some reasons why.
Bank stocks, the article explains, tend to outperform when the economy is showing strong growth. “Right now,” it adds, “investors are thinking the exact opposite: Economic growth is slowing, worries of a recession are rising, the Federal Reserve just cut interest rates for the first time in more than a decade and investors expect more cuts to come.”
Not unexpectedly, therefore, bank share prices have been falling—the article notes that the KBW bank index is down about 17 percent over the past 12 months. According to Bank of America head of US equity and quantitative strategy Savita Subramanian, “nobody is willing to buy” bank stocks, and adds, “They are still treated as the toxic, levered housing play they were in 2007.”
But things could change for bank stocks, the article notes, citing the following factors:
- If a recession doesn’t descend soon, bank stocks could become attractive: “The financial sector’s price-to-earning’s ratio…is near its lows of the past five years and easily the lowest of any of the S&P 500’s 11 sectors.”
- “Banks are much healthier than they were during the financial crisis,” with bank capital high and profitability continuing to grow.
- Banks have been giving back more money to shareholders. The article cites Buffett’s comment in his 2016 letter to Berkshire shareholders: “Many of our investees, including Bank of America, have been repurchasing shares, some quite aggressively. We very much like this behavior because we believe the repurchased shares in most cases have been underpriced.”
The article concludes with comments from Wells Fargo Investment Institute head of global equity strategy Audrey Kaplan: “If we are in a low-return environment—let’s say just 2 percent to 3 percent return over the next 12 months—and you have a sector paying more than a 6 percent total yield, it makes the sector very attractive.”