Buffett’s Startling Lack of Diversification (Part Three): The Stock He Bought While Others Sold

Talk about being greedy when others are fearful. From the first quarter of 2009 -- when the financial sector was being left for dead -- through the third quarter of this year, Warren Buffett increased Berkshire Hathaway’s (BRK.B) stake in Wells Fargo (WFC) from 290 million shares to 422.5 million shares. At a current market value near $14 billion, Wells Fargo accounts for more than 19% of Berkshire Hathaway’s investment portfolio, nipping at the heels of the conglomerate’s Coca-Cola (KO) stake, which at the end of the third quarter accounted for 20% of assets.

When fourth quarter holdings are released early next year there’s a distinct possibility Wells Fargo could nudge past Coca-Cola as Buffett’s biggest bet. He said he was buying more shares in October -- when the market was smacking around financials -- while Berkshire has not added to its Coca-Cola stake since 1994. Berkshire’s other two mega-holdings are American Express (AXP) and International Business Machines (IBM), and the four stocks together comprise a stunning 70% of Buffett’s $75 billion investment portfolio.

At first glance, Wells Fargo seems an unlikely rival for Buffett’s affections when compared to the iconic Coca-Cola brand. In the wake of the financial crisis, the banking industry is going to be in image-repair mode for a loooong time. But that’s just the sort of “fearful” environment that appeals to Buffett the Buyer. He’s boosted Berkshire’s stake by 45% during a period where the stock continues to sell at a historically low PE ratio.

WFC PE Ratio TTM Chart

WFC PE Ratio TTM data by YCharts

While its valuation hasn’t budged post-crisis, two key profitability measures have been healing nicely.

WFC Return on Assets Chart

WFC Return on Assets data by YCharts

WFC Return on Equity Chart

WFC Return on Equity data by YCharts

While JPMorgan Chase (JPM) is Wells Fargo’s main competition in the banking sector -- let’s leave the crisis-addled Bank of America (BAC) and Citigroup (C) out of contention for now -- they are operating on separate planes. Wells Fargo is all about plain vanilla consumer and commercial banking while JPMorgan relies more on its prop trading desks. Sizing up a business that is essentially looking to sell more product to an ever-widening base of retail and business customers (Wells Fargo) seems far more knowable - and inevitable -- than investing in a business highly dependent on the outcomes of future trades -- and trading personnel -- that can’t be fathomed today (JPMorgan.)

That said, a near 20% bet on a bank, even a conservatively managed one, carries ample risk. During the financial crisis, Wells Fargo stock fell more than 70% from mid September 2008 through the market low in March 2009. The S&P 500 fell 44% in the same stretch. As frightful as that was, Berkshire Hathaway did only minor trimming of its Wells Fargo position during the worst of the crisis. Since it began its most recent buying binge of Wells Fargo stock in early 2009, the stock has more than tripled.

Carla Fried, a contributing editor at ycharts.com, has covered investing for more than 25 years. Her work appears in The New York Times, Bloomberg.com and Money Magazine.

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