Warren Buffett “Guarantees” These 2 Bank Stocks

Imagine having the opportunity to invest into companies that are “guaranteed” by one of the world’s wealthiest men — Warren Buffett. Most investors would jump at the chance to know they are on the same side as successful investors like him. 

Does this seem like pie-in-the-sky thinking? Well, it’s not.

Buffett has just issued a personal guarantee on the controversial bank sector.

In mid-January, the Oracle of Omaha appeared on Bloomberg and surprised Wall Street, personally guaranteeing the safety of the U.S. banking segment.

“The banks will not get this country in trouble, I guarantee it,” he said.

“The capital ratios are huge, the excesses on the asset side have been largely cleared out… we own bank shares and I personally own stock in banks… I do not see problems in these things.” 

Clearly, Buffett’s commitment to the banking sector goes beyond just his words. More than 37% of his $75 billion-plus portfolio is dedicated to this sector, according to our friends at GuruFocus.com. In fact, out of this 37%, nearly 23% is focused on three U.S. banks — Wells Fargo (NYSE: WFC), M&T Bank (NYSE: MTB) and U.S. Bancorp (NYSE: USB)

Here’s a closer look at two stocks the billionaire investor has large stakes in.

1. M&T Bank 
After dumping nearly 1.5 million shares of this bank in early 2010, Buffett is back on the “buy” side, with a purchase of more than 18,000 shares during the third quarter of 2011. There has been no activity since then, yet Buffett is sitting on nearly 5.5 million shares, representing a little more than 4% of shares outstanding, valued at nearly half a billion dollars.#-ad_banner-# 

The bank has $78 billion in assets and is among the top-20 largest commercial bank-holding companies in the United States. During the past five years, the bank has increased revenue at a rate of 4.4%, free cash flow at 18.6% and book value at 6% annually. 

The metrics Buffett bases his decision on are all showing signs of improvement. The tier 1 common ratio, which measures a bank’s financial strength, is at 7.5%, up from 6.9% a year earlier.

The recent technical picture shows that the stock has been uptrending since September 2012, but has hit heavy resistance at $104. Investors should wait until the $104 level is broken on a daily close to enter with a 12-month target of $110. 

2. Wells Fargo
Buffett loves this bank, first purchasing it in 1989. Beginning in the first quarter of 2009 to the third quarter of 2012, he purchased more than 12 million shares at a price of up to $34. Buffett now owns more than 422 million shares, or a little more than 8% of the company, valued at more than $14 billion.

Improvements have been taking place across the board during the past half decade. Revenue has been growing at a nearly 10% annual rate to $21.9 billion, while EBITDA has been increasing by 4% annually to 36.3%. Book value also ramped up more than 14% during the same time frame to $27.47 per share. 

Deposits increased a little more than 7% to almost $929 million from a year ago. The tier 1 common ratio expanded to 10.1% from 9.5% a year earlier, while total risk to assets went from 11.2% to 10.8% year-over-year. Meanwhile, nonperforming assets dropped from $25.3 billion to $24.5 billion during the third quarter of 2012. 

Looking at the short-term technical picture, the price has bounced from the mid-November lows and is now pushing against resistance in the $35 range. Waiting for a daily breakout close above $36 with a 12-month target of $40 makes sense with this Buffett favorite.

Risks to Consider: The U.S. banking sector is not out of the woods yet. The massive mortgage default overhang and ultra-low interest rates spells a difficult situation for the sector. Buffett guaranteeing the bank sector is a positive move, but it’s no promise investors will make money buying into his picks. In the hedge fund business, we call Buffett’s words, “talking his book,” meaning he is promoting his own holdings.

Action to Take –> Having said that, banks have made substantial improvements in the past several years. However, I’m still not ready to buy either of these banks right now, even after Buffett’s words. But investors who like to track and follow the Oracle of Omaha’s footsteps should wait for the breakout close above $104 for M&T Bank and above $36 for Wellls Fargo. Buffett singing the praises of the entire banking sector can only help these stocks.

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