The financial sector has had numerous setbacks to its recovery in 2011, and many gurus who bet on it, such as John Paulson and Bruce Berkowitz, have had disappointing returns as a result. Over the last year, the financial sector itself had a negative return of 10.53%. Many gurus believe the drop in stock prices has made banks and other financial companies bargains, though the recovery may take longer than previously expected. These are the financial stocks gurus bought most in the third quarter: Wells Fargo & Co. (WFC, Financial), Berkshire Hathaway B (BRK.B, Financial), Visa (V, Financial) and Bank of New York Mellon (BK, Financial).
(To read more of the top hedge fund buys by sector, see What Technology Stocks Hedge Fund Gurus Are Buying, and Oil & Gas Stocks the Most Guru Hedge Fund Managers Own.)
Wells Fargo & Co. (WFC)
Wells Fargo has made significant financial progress in the last several years. It had $895 billion in deposits in the third quarter 2011, up from $815 billion the prior year, making it the second largest bank by deposits. Its balance sheet is strong as well. Its Tier 1 common equity increased from 8% to 9.3% in the same span of time, and it has over $100 billion in cash and short-term investments. In the third quarter, the bank purchased 22 million common shares and paid for 6.3 million more shares in a forward purchase transaction that settled in the fourth quarter of 2011.
In its most recent presentation from December 6, Wells Fargo touts its lower operational, balance sheet and market risk than its large peers. For instance, its credit exposures charge-off ratio for the third quarter was 1.4%, compared to 1.4% for JPM, 2.1% for BAC and 2.8% for Citigroup. It also beat its peers in derivatives exposures, trading assets, cross-border risk, liquidity and market risk.
Wells Fargo is not free of all risk of litigation stemming from the 2008 credit crisis, however. It reached a $148.2 million settlement on Thursday with several government entities for charges that former Wachovia employees rigged 58 bidding competitions for business with cities and counties. Wells Fargo acquired Wachovia Bank in 2008. The transactions took place before Wells acquired Fargo by employees who are no longer with the company. Wells said in a statement that the payments will not have an adverse effect on its financial results.
Eighteen gurus bought or added to their holdings in Wells Fargo in the third quarter. Warren Buffett has the largest position, owning 6.85% of the company.
Berkshire Hathaway B (BRK.B)
Berkshire Hathaway is the vast conglomerate owned by Warren Buffett. Buffett authorized the first-ever repurchase of Berkshire Class A and Class B shares in September. He believed that the underlying businesses of Berkshire were worth considerably more than a 10% premium over the then-current book value of the shares. After many swings, Berkshire stock is down 4.2% year to date.
Berkshire’s book value increased 1.5% from the beginning of 2011 to September 30. In the third quarter, Buffett’s company reported lower third-quarter profit from the previous year, falling to $2.3 billion from $2.99 billion a year ago. A $1.6 billion loss in derivatives negatively impacted the results. Berkshire also manages a $4 billion larger float than it did at year-end 2010, equaling $70 billion at Sept. 30, 2011.
Most recently, the company acquired the Omaha World newspaper and a $2 billion solar farm in California through its subsidiary, MidAmerica Energy Holdings Company. The Topaz Solar Farm, a 550-megawatt photovoltaic power plant from First Solar Inc. (FSR) will generate enough energy to power 160,000 average California homes. MidAmerican is already the No. 1 owner of wind-powered energy generation among U.S. rate-regulated utilities. First Solar’s stock has fallen 65% year to date as prices for solar panels have fallen 40%, putting pressure on solar companies’ profits and forcing some out of business.
Thirteen hedge fund gurus bought or added to their positions in Berkshire Hathaway B shares in the third quarter. Bill Gates’ foundation owns 3.88% of the company, the largest position.
Visa (V)
Visa’s free cash flow has burgeoned since 2008, going from $120 million to $3.5 billion in 2010. Revenues have also increased each year since 2008, as has net income, return on equity, return on assets, operating margins, and net margins. Gross margins remained flat. The company has about $6 billion of cash on its balance sheet, along with about $5 billion in long-term debt.
In the fourth quarter, Visa increased its existing share repurchase program by $1 billion and its quarterly dividend payment by 47%.
Visa operates on a two-sided market economic platform, which Richi Golsalia discussed in depth here. He explains Visa’s business as: “The merchant acquirer retains a small percent of the interchange fee and passes off a large portion to the issuer bank. The payment network charges the bank a very small transaction fee for using the network, but net they are essentially letting the bank make the most from the interchange fee, hence the banks are on the subsidy side. The payment networks also makes a very small transaction fee from the acquirer. So, even though the merchant is not compensating payment network directly, I still consider it to be the money side of the network since it's the one paying for the subsidy the payment networks are providing to the banks.”
Chuck Akre noted in his quarterly letter that he bought shares of MasterCard (MA) after the enactment of the Durbin amended Dodd-Frank Bill created uncertainty in the space. Since then, he said, the Federal Reserve “provided some clarity for the space, and the shares have responded positively.” He also said card network businesses were superb, with significant pricing power.
With the purchase of Fundamo, a mobile financial services platform provider in developing economies, Visa is launching a product that will help it further extend its reach into developing countries. The product is a prepaid account that can be accessed through a mobile phone, providing users a secure electronic payment account.
Eleven hedge fund gurus bought or added to their holdings of Visa in the third quarter. Primecap Management has the largest position, with 0.5% of shares outstanding.
Bank of New York Mellon (BK)
Bank of New York Mellon has been strong at recapitalizing since the 2008 crisis. They have over $140 billion on their balance sheet at Sept. 30, 2011, compared to $78 billion at year-end 2010. Long-term liabilities and debt increased slightly, to about $41 billion at Sept. 31, compared to $39 billion at year-end 2010. Revenue has wavered from 2008 to $14.5 billion in 2010, almost up to its record-high 2007 level of $15 billion. Return on assets and return on equity both returned to positive from negative returns in 2009.
The targeted annual payout ratio for the bank is 20-25%, with a combined dividend/share repurchases targeted payout rate of 60-65% of net income. At Sept. 30, 2011, it had reached 6.5% of Tier 1 common equity ratio, virtually unchanged since the previous quarter, and projects it will reach 9.5% to 10.5% by 2014.
At a Goldman Sachs financial services conference in New York on Wednesday, BK’s chief executive, Gerald Hassell, said the bank will start treating smaller clients differently from large ones through a tiered pricing approach. “"We are optimistic that we can really try to change the pricing paradigm of some of this business, because we just simply have to start getting paid for all of the services we deliver, and we can't simply rely on capital markets activities for profitability," he said, according to Reuters.
Eleven gurus bought or added to their Bank of New York Mellon holdings in the third quarter. Chris Davis has the largest position, with 9.2% of shares outstanding.
To research more stocks owned by hedge funds by industry, click here.
(To read more of the top hedge fund buys by sector, see What Technology Stocks Hedge Fund Gurus Are Buying, and Oil & Gas Stocks the Most Guru Hedge Fund Managers Own.)
Wells Fargo & Co. (WFC)
Wells Fargo has made significant financial progress in the last several years. It had $895 billion in deposits in the third quarter 2011, up from $815 billion the prior year, making it the second largest bank by deposits. Its balance sheet is strong as well. Its Tier 1 common equity increased from 8% to 9.3% in the same span of time, and it has over $100 billion in cash and short-term investments. In the third quarter, the bank purchased 22 million common shares and paid for 6.3 million more shares in a forward purchase transaction that settled in the fourth quarter of 2011.
In its most recent presentation from December 6, Wells Fargo touts its lower operational, balance sheet and market risk than its large peers. For instance, its credit exposures charge-off ratio for the third quarter was 1.4%, compared to 1.4% for JPM, 2.1% for BAC and 2.8% for Citigroup. It also beat its peers in derivatives exposures, trading assets, cross-border risk, liquidity and market risk.
Wells Fargo is not free of all risk of litigation stemming from the 2008 credit crisis, however. It reached a $148.2 million settlement on Thursday with several government entities for charges that former Wachovia employees rigged 58 bidding competitions for business with cities and counties. Wells Fargo acquired Wachovia Bank in 2008. The transactions took place before Wells acquired Fargo by employees who are no longer with the company. Wells said in a statement that the payments will not have an adverse effect on its financial results.
Eighteen gurus bought or added to their holdings in Wells Fargo in the third quarter. Warren Buffett has the largest position, owning 6.85% of the company.
Berkshire Hathaway B (BRK.B)
Berkshire Hathaway is the vast conglomerate owned by Warren Buffett. Buffett authorized the first-ever repurchase of Berkshire Class A and Class B shares in September. He believed that the underlying businesses of Berkshire were worth considerably more than a 10% premium over the then-current book value of the shares. After many swings, Berkshire stock is down 4.2% year to date.
Berkshire’s book value increased 1.5% from the beginning of 2011 to September 30. In the third quarter, Buffett’s company reported lower third-quarter profit from the previous year, falling to $2.3 billion from $2.99 billion a year ago. A $1.6 billion loss in derivatives negatively impacted the results. Berkshire also manages a $4 billion larger float than it did at year-end 2010, equaling $70 billion at Sept. 30, 2011.
Most recently, the company acquired the Omaha World newspaper and a $2 billion solar farm in California through its subsidiary, MidAmerica Energy Holdings Company. The Topaz Solar Farm, a 550-megawatt photovoltaic power plant from First Solar Inc. (FSR) will generate enough energy to power 160,000 average California homes. MidAmerican is already the No. 1 owner of wind-powered energy generation among U.S. rate-regulated utilities. First Solar’s stock has fallen 65% year to date as prices for solar panels have fallen 40%, putting pressure on solar companies’ profits and forcing some out of business.
Thirteen hedge fund gurus bought or added to their positions in Berkshire Hathaway B shares in the third quarter. Bill Gates’ foundation owns 3.88% of the company, the largest position.
Visa (V)
Visa’s free cash flow has burgeoned since 2008, going from $120 million to $3.5 billion in 2010. Revenues have also increased each year since 2008, as has net income, return on equity, return on assets, operating margins, and net margins. Gross margins remained flat. The company has about $6 billion of cash on its balance sheet, along with about $5 billion in long-term debt.
In the fourth quarter, Visa increased its existing share repurchase program by $1 billion and its quarterly dividend payment by 47%.
Visa operates on a two-sided market economic platform, which Richi Golsalia discussed in depth here. He explains Visa’s business as: “The merchant acquirer retains a small percent of the interchange fee and passes off a large portion to the issuer bank. The payment network charges the bank a very small transaction fee for using the network, but net they are essentially letting the bank make the most from the interchange fee, hence the banks are on the subsidy side. The payment networks also makes a very small transaction fee from the acquirer. So, even though the merchant is not compensating payment network directly, I still consider it to be the money side of the network since it's the one paying for the subsidy the payment networks are providing to the banks.”
Chuck Akre noted in his quarterly letter that he bought shares of MasterCard (MA) after the enactment of the Durbin amended Dodd-Frank Bill created uncertainty in the space. Since then, he said, the Federal Reserve “provided some clarity for the space, and the shares have responded positively.” He also said card network businesses were superb, with significant pricing power.
With the purchase of Fundamo, a mobile financial services platform provider in developing economies, Visa is launching a product that will help it further extend its reach into developing countries. The product is a prepaid account that can be accessed through a mobile phone, providing users a secure electronic payment account.
Eleven hedge fund gurus bought or added to their holdings of Visa in the third quarter. Primecap Management has the largest position, with 0.5% of shares outstanding.
Bank of New York Mellon (BK)
Bank of New York Mellon has been strong at recapitalizing since the 2008 crisis. They have over $140 billion on their balance sheet at Sept. 30, 2011, compared to $78 billion at year-end 2010. Long-term liabilities and debt increased slightly, to about $41 billion at Sept. 31, compared to $39 billion at year-end 2010. Revenue has wavered from 2008 to $14.5 billion in 2010, almost up to its record-high 2007 level of $15 billion. Return on assets and return on equity both returned to positive from negative returns in 2009.
The targeted annual payout ratio for the bank is 20-25%, with a combined dividend/share repurchases targeted payout rate of 60-65% of net income. At Sept. 30, 2011, it had reached 6.5% of Tier 1 common equity ratio, virtually unchanged since the previous quarter, and projects it will reach 9.5% to 10.5% by 2014.
At a Goldman Sachs financial services conference in New York on Wednesday, BK’s chief executive, Gerald Hassell, said the bank will start treating smaller clients differently from large ones through a tiered pricing approach. “"We are optimistic that we can really try to change the pricing paradigm of some of this business, because we just simply have to start getting paid for all of the services we deliver, and we can't simply rely on capital markets activities for profitability," he said, according to Reuters.
Eleven gurus bought or added to their Bank of New York Mellon holdings in the third quarter. Chris Davis has the largest position, with 9.2% of shares outstanding.
To research more stocks owned by hedge funds by industry, click here.
