In the second quarter ended June 30, U.S. stock markets continued their bull run as government stimulus, low interest rates and support for ever-increasing levels of corporate debt helped most companies report higher earnings numbers. Many investors are brushing off concerns about higher inflation, supply chain bottlenecks and lower-than-expected employment numbers; in fact, given the low yields available in the rest of the market, stocks have increased in popularity as protection against inflation.
The major indexes once again reached new unprecedented highs. The S&P 500 surpassed 4,200 for the first time in history during this period, the Nasdaq topped 14,100 and the Dow Jones Industrial Average beat the 34,700 mark.
The U.S. stock market continues to be valued far higher than what the country’s collective businesses are currently worth. The Buffett Indicator, which is the ratio of total market cap to gross domestic product, stands at 201.4% as of Aug. 26, indicating that the U.S. stock market is significantly overvalued. This metric is named after Warren Buffett (Trades, Portfolio), who famously called it “probably the best single measure of where valuations stand at any given moment.”
As the Federal Reserve has repeatedly proven its commitment to keeping interest rates low and making it easier for highly indebted companies to borrow even more money, GuruFocus now includes in this chart the total assets of the Federal Reserve. With Fed support factored in, the valuation ratio of the Buffett Indicator stands at 150.1%, which is still overvalued but not by quite as much. It should be noted that Fed support disproportionately benefits the nation’s largest companies.
In the midst of this overvalued market, there are some stocks that gurus are selling at a higher rate than others, either to take some profits on abnormally high prices or to cut their losses on a name that is expected to underperform. According to GuruFocus’s Hot Picks, a feature which allows investors to screen for the stocks that had the most guru buys or sells in the most recent quarter, the five stocks that gurus were selling the most during the second quarter of 2021 (as determined by net sells) were Bank of America Corp. (BAC, Financial), Charles Schwab Corp. (SCHW, Financial), Alphabet Inc. (GOOG, Financial) (GOOGL, Financial), Philip Morris International Inc. (PM, Financial) and Wells Fargo & Co (WFC, Financial).
Bank of America
Bank of America (BAC, Financial) is a U.S. global bank major headquartered in North Carolina. With approximately $2.81 trillion in total assets, it provides a wide range of traditional, corporate and investment banking services and other financial services.
During the quarter, 24 gurus sold shares of Bank of America while six bought the stock, resulting in 18 net sells. At the quarter’s end, the stock was held by 29 gurus.
Multiple gurus, including Francis Chou (Trades, Portfolio) and Jim Simons (Trades, Portfolio)' Renaissance Technologies, sold out of the stock entirely. Buyers included Charles Brandes (Trades, Portfolio)' firm and Ray Dalio (Trades, Portfolio). Gurus have mostly been selling the stock in recent quarters, with the exception of a buying spike in the last quarter of 2020.
The top guru shareholder of Bank of America is Warren Buffett (Trades, Portfolio) with 12% of shares outstanding, followed by Dodge & Cox with 0.88% and Primecap Management with 0.48%.
During the quarter, shares of Bank of America traded for an average price of $40.96. As of Aug. 30, the stock trades around $41.75 with a 52-week range of $22.95 to $43.49. The GuruFocus Value chart rates the stock as modestly overvalued.
As with other major banking institutions, Bank of America continues to see its traditional revenue stream dry up as interest rates remain near zero. Its investment banking arm has grown in leaps and bounds as more people are investing in stocks due to the lack of yields in just about every other area of the market, but revenue from this business still isn’t enough to make up for the loss of interest income. Given that the stock is now trading above its median price-earnings ratio from the last decade, investors may be thinking that it is overvalued, especially since the Federal Reserve currently has no plans to raise interest rates any time soon.
According to analysts, Bank of America is expected to continue growing its top line in the coming years, reaching $87.80 billion in 2021, $91.39 billion in 2022 and $97.41 billion in 2023. On the other hand, earnings per share isn’t expected to change much, with analysts predicting $3.21 for 2021, $2.98 for 2022 and $3.38 for 2023.
Charles Schwab
Charles Schwab (SCHW, Financial) is a financial services company that offers a wide range of products, from mutual funds and bonds to options and futures. Headquartered in San Francisco, the discount online broker has more than 12 million in client accounts and $3.85 trillion in assets under management.
During the quarter, 18 gurus sold shares of Charles Schwab while four bought the stock, resulting in 14 net sells. At the quarter’s end, the stock was held by 28 gurus.
Lee Ainslie (Trades, Portfolio) sold out of the stock, while Catherine Wood (Trades, Portfolio) cut her position by 30.67%. Ken Fisher (Trades, Portfolio) and Joel Greenblatt (Trades, Portfolio) were among those buying the stock. The chart below shows that gurus have mostly been selling the stock in recent quarters after a buying spree in early 2020.
Dodge & Cox is Charles Schwab’s top shareholder with 3.98% of shares outstanding, followed by Primecap Management with 1.56% and Al Gore (Trades, Portfolio) with 0.75%.
During the quarter, shares of Charles Schwab traded for an average price of $70.66. As of Aug. 30, the stock trades around $73.89 with a 52-week range of $33.79 to $76.37. The GF Value chart rates the stock as significantly overvalued.
Charles Schwab merged with its main competitor, TD Ameritrade, near the beginning of the Covid-19 pandemic, which turned out to be opportune timing for the merger due to the sudden influx of interest in investing. In fact, the newly combined company has seen its number of new accounts rise steadily over the past year, with 3.2 million new brokerage accounts being added in the first quarter of 2021 alone. Everyone wants to get in on the strong bull market, especially since cash will lose value quickly when the Fed is deliberately targeting high inflation. Many gurus seem to think that Schwab’s stock has already priced in these gains.
Analysts expect Schwab to continue growing its top and bottom lines, albeit at a fairly slow pace. For 2021, revenue is expected to come in at $18.26 billion, increasing to $19.01 billion in 2022 and $20.56 billion in 2023. In terms of its bottom line, earnings per share is projected to be $2.72 in 2021, $2.92 in 2022 and $3.48 in 2023.
Alphabet
Based in Mountain View, California, Alphabet (GOOG, Financial)(GOOGL, Financial) is a multinational conglomerate that was formed as part of a restructuring of Google in 2015, in which Alphabet became the parent company of Google and several former Google subsidiaries.
During the quarter, 26 gurus sold voting shares of Alphabet (which trade under the GOOGL ticker) while 12 bought the stock, resulting in 14 net sells. Additionally, 28 gurus sold non-voting shares of Alphabet (which trade under the GOOG ticker) while seven bought the stock, resulting in 21 net sells. As of the quarter’s end, 50 gurus hold voting shares and 45 hold non-voting shares (many of these holdings overlap, with gurus owning both voting and non-voting shares).
Sellers of the stock included Baillie Gifford (Trades, Portfolio) and Andreas Halvorsen (Trades, Portfolio), while buyers included Chris Davis (Trades, Portfolio) and George Soros (Trades, Portfolio). Gurus have mostly been net sellers of Alphabet’s voting and non-voting shares in recent years, as seen in the below charts.
The top guru shareholders of voting shares are Fisher with 0.27% of shares outstanding and Primecap Management with 0.19%. Dodge & Cox has the biggest position in non-voting shares with 0.32% of shares outstanding, followed by Pioneer Investments with 0.15%.
During the quarter, voting shares of Alphabet traded for an average price of $2,328.99. As of Aug. 30, the stock trades around $2,897.25 with a 52-week range of $1,402.15 to $2,919.41. Non-voting shares traded around $2,375.56 during the quarter and are around $2,914.63 as of Aug. 30, with a 52-week range of $1,406.55 to $2,929.78. The GF Value chart rates both stocks as significantly overvalued.
Google’s parent company continues to be a reliable tech stalwart. Its ad revenue, which is its main source of income, has mostly recovered from early 2020 lows, having risen 69% year over year in the second quarter of 2021. The company’s search engine also continues to increase its already-dominant market share. While the number of gurus selling the stock may seem high, the vast majority of the sells are reductions of less than 10%.
The analyst community expects to continue seeing strong growth from Alphabet in the coming years. Revenue estimates average around $231.21 billion for 2021, $269.94 billion for 2022 and $301.34 billion for 2023. In terms of earnings per share, analysts are projecting $96.82 in 2021, $102.79 in 2022 and $112.27 in 2023.
Philip Morris International
Philip Morris International Inc. (PM, Financial) is perhaps the world’s most iconic cigarette and tobacco company. Based in New York, the Swiss-domiciled company owns famous brands such as Marlboro that are sold in 180 markets globally. The company is shifting focus and aims to transition its customers to smoke-free tobacco products.
During the quarter, 16 gurus sold shares of Philip Morris while three bought the stock, resulting in 13 net sells. At the quarter’s end, the stock was held by 21 gurus.
Steven Cohen (Trades, Portfolio) sold out of the stock, while Simons' firm cut its investment by 99.89%. Ken Heebner (Trades, Portfolio) and Jeremy Grantham (Trades, Portfolio) were among those buying the stock. The chart below shows that gurus have been net sellers of the stock over recent years, with the pace of sells accelerating.
First Eagle Investment (Trades, Portfolio) is the most notable guru invested in Philip Morris, holding 0.67% of shares outstanding. The firm is followed by Tom Russo (Trades, Portfolio) with 0.51% and John Rogers (Trades, Portfolio) with 0.26%.
During the quarter, shares of Philip Morris traded for an average price of $95.73. As of Aug. 30, the stock trades around $103.14 with a 52-week range of $68.93 to $103.12. The GF Value chart rates the stock as modestly overvalued.
At a price-earnings ratio of only 18, Philip Morris may seem at first glance to be a value stock. However, both the top and bottom lines have failed to show meaningful growth over the past decade, and with the use of tobacco products declining in developed countries as more people learn of their detrimental effects on health, the company will need to rely on “less harmful” alternatives to not only pick up the slack but to become even more popular than the likes of cigarettes ever were. The company aims to eventually replace all of its cigarette business with less-risky alternatives, though whether this can generate long-term growth remains to be seen.
Analysts seem to have faith that Philip Morris will succeed in making heated tobacco products and other safer alternatives more popular than cigarettes. On average, they forecast the company’s revenue to reach $31.14 billion in 2021, $33.20 billion in 2022 and $34.55 billion in 2023, while earnings per share is projected to come in at $5.92 in 2021, $6.49 in 2022 and $6.89 in 2023.
Wells Fargo
Wells Fargo (WFC, Financial) is a U.S. bank major headquartered in San Francisco. It is the fourth-largest bank in the U.S. by assets. Like its peers, the bank earns most of its revenue from loans and credit cards, though it is subject to an asset cap following its fake accounts scandal back in 2016.
During the quarter, 21 gurus sold shares of Wells Fargo while nine bought the stock, resulting in 12 net sells. At the quarter’s end, the stock was held by 37 gurus.
Ainslie cut his investment in the stock by 97.11%, while Louis Moore Bacon (Trades, Portfolio) trimmed his position by 19.34%. Buyers included diamond Hill Capital and Brandes' firm. Gurus were mostly buying this stock in 2020, but have turned more bearish on it in 2021.
Wells Fargo’s top guru investor is Dodge & Cox with 3.49% of shares outstanding, followed by Primecap Management with 1.21% and Davis with 1%.
During the quarter, shares of Wells Fargo traded for an average price of $44.52. As of Aug. 30, the stock trades around $48.46 with a 52-week range of $20.76 to $51.41. The GF Value chart rates the stock as fairly valued.
Unlike the other bank majors, Wells Fargo does not have a large capital markets or investment banking business, which has hindered its profits relative to peers during the pandemic as interest rates fell and investing allocations skyrocketed. The bank is also still subject to its asset cap, which was only temporarily lifted so that Wells Fargo could participate in government economic stimulus programs. The case with Wells Fargo remains the same as it has since its fake accounts scandal: if the asset cap is lifted, the share price will likely shoot upwards, but as long as the asset cap is not lifted, there are better opportunities among financial stocks.
Analysts estimate that Wells Fargo will continue to report earnings around the same range. Revenue is projected to be $73.59 billion in 2021, $71.46 billion in 2022 and $74.65 billion in 2023. Earnings per share are predicted to come in at $4.05 in 2021, $3.53 in 2022 and $4.05 in 2023.
