Warren Buffett‘s sanguine outlook on the future of big banks continues, with the Oracle of Omaha’s Berkshire Hathaway buying up more bank holdings in the third quarter. The third-quarter holdings report revealed that five of Berkshire Hathaway’s top ten holdings are financial stocks: Bank of America, Wells Fargo, American Express, US Bancorp and JPMorgan Chase. (American Express isn’t technically a bank, but fits the broader category of financial institution.) In fact Buffett clearly thinks Bank of America’s big time troubles are behind it, as Berkshire invested a fresh $6 billion in B of A.
According to Yardeni Research, within the financial sector diversified banks have the lowest forward price-to-earnings ratio (P/E ) at 10.4. Compare that to the tech sector, for example, which has a 17 P/E. The S&P 500 overall is at 16.2. In other words, the financial sector is undervalued. Buffett is, of course, famously a “value investor.” Now put two and two together and you get Berkshire heavily invested in undervalued diversified banking. Voila. It may be that other investors, less cheerful about bank stocks, don’t agree with Buffett’s 2013 assertion that “book value is not the key to evaluating banks.” Buffett said then that the key is earnings. JPMorgan’s Q3 earnings came in at $2.34 a share, above estimates for $2.24: Bank of America earnings came in at 66 cents a share, up 37.5%, with revenue at $22.78 billion.