Warren Buffett tours the grounds of Berkshire Hathaway’s annual meeting in Omaha, Nebraska.
David A. Grogan | CNBC
Berkshire Hathawayled by legendary investor Warren Buffett, has been making a confidential bet on the financial industry since the third quarter of last year.
The identity of the stock – or shares – that Berkshire purchased could be revealed Saturday at the company’s annual meeting in Omaha, Nebraska.
Unless Berkshire is granted confidentiality on the investment for the third quarter in a row, the stake will be disclosed in filings later this month. So Berkshire’s 93-year-old CEO might decide to explain his motives to the thousands of investors flocking to the meeting.
The mysterious bet has intrigued Berkshire investors since it first appeared in disclosures late last year. At a time when Buffett has been a net seller of stocks and lamented a lack of opportunities that could “make a real difference at Berkshire,” he appears to have found something he likes — in finance, no less.
This is an area he has retreated from in recent years amid concerns about rising loan defaults. High interest rates have hurt some financial players like regional U.S. banks while making the yield on Berkshire’s piles of cash in instruments like Treasury bonds suddenly attractive.
“When you’re the GOAT of investing, people care about what you think is good,” said Bill Stone, chief investment officer of Glenview Trust Co., using an acronym for “The Greatest of All Time.” “What makes it even more exciting is that banks are part of his circle of expertise.”
Under Buffett, Berkshire has outperformed the S&P 500 for nearly six decades with an average annual gain of 19.8%, compared to the index’s annual gain of 10.2%.
Coverage Note: The Annual Meeting will be broadcast exclusively on CNBC and streamed live on CNBC.com. Our special coverage begins Saturday at 9:30 a.m. ET.
Disguised bets
According to David Kass, a finance professor at the University of Maryland, Berkshire requested anonymity for the transactions because if the stock was known before the conglomerate built its position, others would also jump in and drive up the price.
Buffett is expected to control about 90% of Berkshire’s massive stock portfolio, leaving the rest to his deputies Todd Combs and Ted Weschler, Kass said.
While the investment disclosure gives no indication of what stock it might be, Stone, Kass and other Buffett watchers believe it’s a multibillion-dollar bet on a financial stock.
That’s because the cost basis of banking, insurance and financial stocks owned by the company rose $3.59 billion in the second half of last year, the only category that increased, according to separate Berkshire filings .
At the same time, Berkshire divested itself of financial stocks by selling insurers Markel And Globe lifewhich led investors to estimate the bet could be as high as $4 or $5 billion by the end of 2023. It is unknown whether this bet was spread across one company or across multiple companies in an industry.
Schwab or Morgan Stanley?
If it were a classic Buffett bet – a large stake in a single company – this stock would have to be a large stock with a market cap of perhaps $100 billion. Holdings of at least 5% in listed American companies trigger a disclosure requirement.
Investors have been speculating for months about how high the stock could be. Funding covers all types of businesses, from private lenders to Wall Street brokers, payment companies and various insurance sectors.
Charles Schwab or Morgan Stanley could be right for you, according to James Shanahan, an Edward Jones analyst who covers banks and Berkshire Hathaway.
“Schwab got crushed last year during the regional banking crisis, they had a problem where retail investors were converting their cash into higher-yielding assets,” Shanahan said. “Last year no one wanted to own that name, so Buffett could have bought as much as he wanted.”
Other names that were in circulation – JPMorgan Chase or BlackRockfor example, are possible but may be less useful due to valuations or business mix. Truist and other higher quality regional banks could fit Buffett’s parameters, as could insurers AIGsaid Shanahan, even though their market cap is smaller.
More from Berkshire Hathaway’s annual meeting
Buffett & Banks
Berkshire has owned financial companies for decades, and Buffett has stepped in on multiple occasions to inject capital — and trust — into the industry.
Buffett served as CEO of scandal-hit Salomon Brothers in the early 1990s and helped turn the company around. He pumped in $5 billion Goldman Sachs in 2008 and another $5 billion Bank of America in 2011 and eventually became its largest shareholder.
But after 2018 saw an increase in the number of lenders, from universal banks like JPMorgan to regional lenders like PNC Financial And US BankIn 2020, he sharply reduced his exposure to the sector because of concerns that the coronavirus pandemic would weigh on the industry.
Since then, he and his deputies have largely avoided increasing his financial holdings, aside from modest positions in Citigroup And Capital one.
“Fear is contagious”
Last May, Buffett told shareholders to expect further turmoil in the banking sector. He said Berkshire could deploy more capital in the industry if needed.
“The situation in banking is very similar to what it has always been in banking, which is that fear is contagious,” Buffett said. “Historically, sometimes the fear was justified, sometimes not.”
Wherever he placed his bet, the move will be seen as a boost for the company and perhaps even the entire industry, given Buffett’s track record of identifying value.
It’s unclear how long regulators will allow Berkshire to shield its moves.
“I hope he reveals the name and talks about the strategy behind it,” Shanahan said. “The SEC’s patience may be exhausted; at some point it will appear that Berkshire is receiving preferential treatment.”
—CNBC’s Yun Li contributed to this report.
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2024-05-04 13:53:57
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