Data shows that Wells Fargo & Co. shares returned 61 percent last year, outpacing the performance of any of Berkshire Hathaway Inc.'s portfolios ended Sept. 30 last year. It also far outperformed the company's two biggest bets: Apple and Bank of America.
Buffett's Berkshire will disclose the latest information about the stake in the coming days. Its filings have shown that the company has largely missed a good opportunity for Wells Fargo to rebound.
For years, Wells Fargo has been the largest bet on Berkshire Hathaway's stock portfolio, often praised by Buffett himself. But as the bank's scandal embroiled, by September last year, Berkshire had cut its stake from 323 million shares at the end of 2019 to about 675,000 shares.
Wells Fargo's shares rose sharply last year, and there are signs that EFFORTs by CEO Charlie Scharf to reverse the bank's decline are making progress.
Scharf and his team cleared some key regulatory hurdles, with full-year profits surging more than 10-fold last year after falling sharply in 2020. While Wells Fargo has also suffered what it calls a "setback" in terms of regulation, the bank ranked third out of 24 large U.S. banks in the KBW Bank Index in 2021, compared with a year ago at the bottom.
"This is the first time in a long time that Wells Fargo has generated a return," said Kyle Sanders, an analyst at Edward Jones Investments, who has been recommending buying the stock since 2018.
"There's a growing sense of urgency to address regulatory issues, and they say they're going to cut costs and expenses — and they do."
But for Buffett, the process came too slowly. His withdrawal began in 2017, a year after the scandal began, and then accelerated during the pandemic.
Robert S. David Kass, a finance professor at the University of Maryland's Robert H. Smith School of Business, said the reduction may reflect Berkshire reconsidering its bank exposures in the wake of the coronavirus pandemic and turning to Bank of America, in part due to disappointment with the speed with which Wells Fargo has cleaned up its legacy.
Kass said Buffett has "very high ethical standards" when it comes to stock picking. Buffett also hinted at his considerations for other aspects.
In 2019, when Wells Fargo was looking for a new CEO, he warned the bank not to pick people from Wall Street. In the end, Wells Fargo's board chose Scharf, who once ran the Bank of New York Mellon Corp., who was JPMorgan's deputy to Jamie Dimon.
In the financial sector, the investment target is replaced
After the outbreak, Berkshire withdrew from some financial firms, cutting its stakes in Goldman Sachs Group Inc. and JPMorgan. Its exposure (at cost) to banks, insurers and other financial firms fell (at cost) from about 37% before the COVID-19 crisis at the end of 2019 to about 26% at the end of September.
While Wells Fargo's stock gained the most in Berkshire Hathaway's portfolio of common stocks, the impact on Berkshire has been minimal. If Berkshire's investment in Wells Fargo remains unchanged from last September, beekshire's stake in Wells Fargo will be worth $32.4 million by the end of 2021. Meanwhile, apple stock returned nearly 35 percent last year, bringing Berkshire's stake to $157.5 billion.
In addition, as of September, Bank of America remained Berkshire Hathaway's second-largest investment in common stock, with the stock returning nearly 50 percent last year. Buffett has publicly expressed his admiration for Bank of America CEO Brian Moynihan, calling him "America's most undervalued bank executive."
Overall, Buffett "loves financial stocks, he loves banking, he knows a lot about that," Kass said, "and from an investment perspective, he turned to support Bank of America." ”