During the stimulus-fueled bull market of 2020, Warren Buffett (Trades, Portfolio) sold a few bank stocks in the first quarter and ditched the airlines, but otherwise he mostly stayed put. He was criticized by many for “missing out” on the bull market, sitting on a ton of cash and not loading up on cheap stocks.
However, I agree with Buffett that the market conditions of 2020 were not normal. He understood the sugar high would eventually come crashing down as it did during the dot-com bubble. To the dismay of many growth stock investors, Buffett was right again. As inflation spiked, multiples corrected, and those who did not time things right and sell out at the peak have really lost out. Many investors are now left holding the bag and do not have the excess cash to take full advantage of the real value opportunities.
Thanks to his patience, Buffett was ready and has been deploying an immense amount of cash during this recessionary environment. A major stock he has loaded up on is Occidental Petroleum (OXY, Financial), of which Berkshire Hathaway (BRK.A, Financial)(BRK.B, Financial) now owns close to 30% of.
Even with this splashing of cash in a bear market, though, there are still some stocks that the Oracle of Omaha is selling. According to GuruFocus Real-Time Picks, a Premium feature, Buffett has recently slashed his position in U.S. Bancorp (USB, Financial) by over 50%. Investors should note, this is not part of the third-quarter 13F but a Real-Time Pick that occurred in the fourth quarter.
Buffett slashes U.S. Bancorp
According to GuruFocus data, Buffett's Berkshire Hathaway sold 55.72% of its position in U.S. Bancorp, or 66.8 million shares, in the third quarter of 2022 and on Oct. 31. The third-quarter trade data comes from the firm's 13F, while the Oct. 31 trade comes from GuruFocus Real-Time Picks, a Premium feature that tracks trades reported to the SEC outside of the normal quarterly filings.
Investors should be aware that 13F reports do not provide a complete picture of a guru’s holdings. They include only a snapshot of long equity positions in U.S.-listed stocks and American depository receipts as of the quarter’s end. They do not include short positions, non-ADR international holdings or other types of securities. However, even this limited filing can provide valuable information.
Breaking down the two trades, Buffett's firm sold 42,016,921 shares of the stock in the third quarter and another 24,742,666 shares on Oct. 31.
The average share price on Oct. 31 $42.45 per share. Berkshire now owns only 3.6% of U.S. Bancorp's shares outstanding as of Oct. 31, which is down from the 8% holding on June 30. Therefore, Buffett could potentially still be selling, but we would not know it because it is no longer required to be reported to the SEC outside of the normal quarterly earnings report.
Has Buffett made a profit?
Buffett first bought U.S. Bancorp in 2006, which was not great timing given the financial crisis came just a couple of years later. Despite the plummet during the crisis, Buffett held the stock for many years but then trimmed his position by 5% in the second quarter of 2022, selling 6.6 million shares. Berkshire Hathaway originally purchased the stock for an average price of approximately $33 per share in 2006. At an average sale price of $42.45, the guru has made about 29% on his money based on my estimates. This is not a bad return, but given the lengthy time period, Buffett has done much better with other stocks such as Apple Inc. (AAPL, Financial).
Third-quarter results
In the third quarter of 2022, U.S. Bancorp reported $6.3 billion in revenue, which beat analysts' estimates by $89.12 million. However, this was roughly flat year over year.
Retail banks such as U.S Bancorp have been hit by two opposing macroeconomic forces, which were driven by interest rate hikes by the Federal Reserve. Higher interest rates generally result in better net interest income margins for banks, which is a positive sign. For example, in the third quarter, U.S. Bancorp generated a 20% increase in net interest income, which jumped from $3.2 billion to $3.8 billion. However, higher interest rates have squeezed the consumer with higher mortgage payments. This has resulted in an average 30-year mortgage rate of 6.95% at the time of writing, which is the highest level since before the financial crisis. These higher rates have caused U.S existing home sales to plummet to close to pandemic levels.
For U.S. Bancorp, this means its mortgage banking business has reported an eye-watering revenue decline of 81%. This has resulted in an 8.3% decline in noninterest revenue for the three-month period.
The strong exposure to the housing market and mortgages could be reasons why Buffett has sold a large portion of the stake.
A key metric that is useful when analyzing bank stocks is to look at the efficiency ratio, which is the ratio of non-interest expenses to net revenue. Analyzing this metric over a single quarter can highlight a lot of noise from one-off expenses, therefore I will focus on a year-to-date period. In this case, U.S. Bancorp has an efficiency ratio of 0.61, which was lower than competitors Truist Financial (TFC, Financial) at 0.65 and PNC Financial Services (PNC, Financial) at 0.63. Therefore, U.S. Bancorp is the worst of the bunch, which is another black mark against the business.
Earnings per share were $1.16 in the third quarter, which aligned with analyst estimates. However, year-to-date earnings per share are down 22% and net income has declined by 23.9%. As you can see from the chart below, U.S. Bancorp has a lower net interest margin than competitors.
Analyzing a bank's balance sheet is usually more complicated as there is a variety of financial instruments and securitizations. However, we do know that U.S. Bancorp reported a 9.9% increase in loans and a 3.3% increase in total deposits as consumers increased savings. This growth was slightly better than peers Truist Financial and PNC, which reported 0.1% and 4.2% declines in deposits.
The company pays a solid dividend yield of 4.72%, which is extremely consistent having grown consecutively over the past 11 years.
Valuation
The price-book ratio is a simple measure of value for banking stocks. In this case, U.S Bancorp has a price-book ratio of 1.64, which is about 5% cheaper than its five-year average. This is an equivalent valuation to competitor PNC, which also trades at a price-book ratio of 1.6. However, Truist Financial trades at a cheaper price-book ratio of 1.2.
Final thoughts
Buffett is arguably the greatest investor of all time. His moves may seem “wrong” or mysterious in the short term, but longer term the majority have been very successful.
U.S. Bancorp looks to be an average business; it is valued higher than competitors and its strong exposure to mortgages is acting as a headwind given the recessionary environment. Its valuation is also pretty average and not the cheapest relative to competitors. Given these factors and Berkshire’s recent selling spree, I believe Buffett may have some better places to deploy the cash.
