Warren Buffett (Trades, Portfolio) has planted nearly half — 42.6% — of his Berkshire Hathaway (BRK.A)(BRK.B) portfolio into the financial services sector. His second highest weighted sector — consumer defensive — comes in at a distant 25.2%. His increasing allocation of funds in the financial sector signals an increasing confidence in the prospects of American banks and financial institutions. In fact, this is the most exposed to the financial sector he has been since mid-2006.
Buffet asserted in his 2013 annual letter that, when selecting stocks, “We first have to decide whether we can sensibly estimate an earnings range for five years out, or more. If the answer is yes, we will buy the stock (or business) if it sells at a reasonable price in relation to the bottom boundary of our estimate. If, however, we lack the ability to estimate future earnings – which is usually the case – we simply move on to other prospects.”
From this statement it can be reasonably assumed that he sees strong earnings prospects for the sector in the following five years, in addition to reasonable prices for their stock.
Buffett’s favorite companies in the financial sector are Wells Fargo & Co. (WFC), American Express Co. (AXP) and U.S. Bancorp (USB). The consensus favorites of all gurus in the fourth quarter were Visa (V), Citigroup (C) and AIG (AIG).
The Most-Purchased Stocks
In the fourth quarter, 21 gurus either started new positions or increased their positions in Visa. The largest new buy was made by Bill Nygren (Trades, Portfolio), who established a 740,000-share position, equating to 1.4% of his assets managed. The largest position overall is held by Frank Sands (Trades, Portfolio), who has positioned it at 7.2% of his portfolio, owning 1.57% of shares outstanding. He decreased his share count by 9.69% in the fourth quarter, keeping a remaining 12,376,651 shares, with a gain of 174% on his average buy price.
In the first quarter quarter, Visa reported 9% year-over-year earnings growth at $1.4 billion, or $2.20 per share, up 14%, on payments volume growth of 13% at $1.1 trillion. For full fiscal year 2014, the company expects earnings per share growth in the mid to high teens.
Visa’s 10-year revenue and earnings growth history:
In addition to trading close to a 10-year high stock price at $220.77 per share, Visa has a P/S close to a three-year high at 11.85, P/B close to a one-year low at 5.2, and P/E at 28.3.
Nine gurus bought or added Citigroup to their portfolio in quarter four, the most aggressive being Paul Tudor Jones (Trades, Portfolio), who made it 1.1% of his portfolio with 418,951 new shares. James Barrow (Trades, Portfolio) holds the largest position, holding 0.73% of outstanding shares, totaling 22,342,519.
Citi, a global bank, reported $2.7 billion in fourth quarter net income, or $0.85 per diluted share, from $1.2 billion, or $0.38 per diluted share, a year prior. With operating net income growth of 15% from 2012, the company’s net income was its highest since the financial crisis.
Citigroup’s revenue and net income history:
Citigroup trades with a P/E of 10.8 and P/B of 0.72, both near their respective one-year lows. It has a P/S of 2.0.
Ten gurus chose quarter four to increase or start their position in AIG. Jim Simons (Trades, Portfolio) made the largest new buy with 627,560 shares at 0.08% of his assets managed. Bruce Berkowitz (Trades, Portfolio) by far has the largest position in the company, with almost 17% of shares outstanding spread among his funds, at an approximate 65% gain from his average buy price.
AIG in the fourth quarter reported $2 billion, or $2.34 per share in net income, compared to a net loss of $4.0 billion or $2.68 per diluted share in fourth quarter 2012, which included Storm Sandy and the sale of ILFC. This brought total earnings per share for the year to $6.13, up from $2.04 in 2012.
AIG’s 10-year earnings and revenue history:
AIG’s stock price of around $48.59 is close to a five-year high, as is its P/S ratio at 1.05. It also has a P/E of 8.1 and P/B of 0.7.