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James Li
James Li
Articles (630)  | Author's Website |

Warren Buffett’s Big Banks Slump as Yield Curve Begins to Invert

Top US banks tumble as short-term yields exceed long-term yields

Warren Buffett (Trades, Portfolio)’s major bank holdings, which include Bank of America Corp. (NYSE:BAC), Wells Fargo & Co. (NYSE:WFC), U.S. Bancorp (NYSE:USB), Goldman Sachs Group Inc. (NYSE:GS) and JPMorgan Chase & Co. (NYSE:JPM) continued Tuesday’s major slump on Thursday on fears of an inverting yield curve, a major harbinger of a potential market recession.

Dow tumbles nearly 500 points, adding to Tuesday’s woes

The Dow traded near 24,583.43 around 9 a.m., adding nearly 500 points to Tuesday’s 800-point nosedive as the gap between short-term Treasury yields and long-term Treasury yields begins to narrow. As of Dec. 3, the spread between the 10-year yield and the one-year yield is approximately 0.26% while the spread between the 10-year yield and the two-year yield is approximately 0.15%.

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Bank of America

Representing 11.69% of the equity portfolio, Bank of America is Buffett’s largest bank holding and second-largest overall holding, just behind Apple Inc. (NASDAQ:AAPL). The Charlotte, North Carolina-based bank traded near $25.80 around 9 a.m., down approximately 4.44% from the previous close of $27 and approximately 15.29% lower than the third-quarter average price of $30.46.

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GuruFocus ranks the bank’s financial strength 4 out of 10: while the bank’s equity-to-asset ratio of 0.11 outperforms 68% of global competitors, Bank of America’s debt-to-equity ratio of 1 ranks lower than 63% of global banks. Despite this, the website lists two positive investing signs: a price-book ratio near a one-year low of 1.08 and a dividend yield near a five-year high of approximately 1.93%.

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Other gurus with large holdings in Bank of America include Dodge & Cox and Pioneer Investments (Trades, Portfolio).

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Wells Fargo

Representing 10.52% of the equity portfolio, Wells Fargo is Buffett’s second-largest bank holding and third-largest overall. The San Francisco-based bank traded near $50.42 around 9 a.m., down approximately 2.64% from the previous close of $51.79 and approximately 11.70% lower the third-quarter average price of $57.10.

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GuruFocus ranks Wells Fargo’s financial strength 4 out of 10: although the company’s debt-equity ratio is near a 10-year low of 0.87, Wells Fargo has increased its debt levels over the past three years, a warning sign of potential financial distress. Despite this, the bank’s price-book ratio of 1.36 is near a two-year low.

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Other gurus with large holdings in Wells Fargo include PRIMECAP Management (Trades, Portfolio) and Chris Davis (Trades, Portfolio).

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U.S. Bancorp

U.S. Bancorp, Buffett’s seventh-largest holding overall, represents 2.98% of the equity portfolio. The Minneapolis-based regional bank traded around $51.71 at market open, down 1.69% from the previous close of $52.60 and approximately 2.38% lower than third-quarter average price of $52.97.

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U.S. Bancorp’s cash-debt ratio of 0.31 and a debt-equity ratio of 1.29 both underperform over two-thirds of global competitors. Such metrics contribute to a poor financial strength rank of 4. Additionally, GuruFocus lists two severe warning signs: increasing long-term debt and asset growth faster than revenue growth.

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Goldman Sachs

Goldman Sachs, Buffett’s ninth-largest holding overall, represents 1.86% of the equity portfolio. The New York-based investment bank traded around $180.94 at market open, down approximately 1.93% from the previous close of $184.31 and approximately 22.21% lower than the third-quarter average price of $232.61.

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Goldman Sachs’ equity-asset ratio of 0.09 and debt-equity ratio of 3.43 both underperform over 90% of global competitors according to GuruFocus data, suggesting weak financial strength.

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Despite low financial strength, Goldman Sachs offers a dividend yield near a five-year high of 1.83% and has a price-book ratio near a two-year low of 0.91.

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JPMorgan Chase

JPMorgan Chase, Buffett’s 10th-largest holding overall, represents 1.82% of the equity portfolio. The New York-based bank traded near $103.24 at 9 a.m., down 3.81% from the previous close of $107.23 and approximately 9.06% from the third-quarter average price of $113.52.

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JPMorgan Chase’s net profit margin is near a 10-year high of 27.68% while the bank’s return on equity is near a 10-year high of 10.82%. Both metrics are outperforming over 60% of global competitors, suggesting good profitability potential.

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Even though the bank trades near a 10-year high, JPMorgan Chase’s price-book ratio is near a one-year low of 1.49.

See also

Buffett’s other top holdings in financial services include American Express Co. (NYSE:AXP), Moody’s Corp. (NYSE:MCO) and Bank of New York Mellon Corp. (NYSE:BK).

One new feature of the guru pages is a revamped sector weightings page. The new page allows you to view a guru’s equity portfolio as a pie chart illustrating the portfolio weights for each sector. A second pie chart below illustrates the industry weights within a specific sector, which you can select by clicking on the drop-down menu located in the top-right corner of the “weighting history chart” shown in the image below.

Disclosure: No positions.

Read more here:

Warren Buffett's Top 5 Holdings

'I Think I Could Make 50% a Year:' Warren Buffett

Warren Buffett's Best Business Decision

About the author:

James Li
I am an editorial assistant and researcher at GuruFocus. I have a Master's in Finance from SMU, and I enjoy writing reports on financial trends and investor portfolios. Follow me on Twitter at @JamesLiGuru!

Visit James Li's Website


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