Berkshire Hathaway (NYSE: BRK-A)(NYSE: BRK-B) chairman and CEO Warren Buffett is an unabashed fan of finance industry stocks. Exactly half of Berkshire's top 10 holdings by market value are financial-service concerns or other companies that somehow fit into the sector. For many years, the company has owned especially massive stakes in both Wells Fargo (NYSE: WFC) and American Express.
However, neither of these stalwarts is Buffett's current favorite in the sector, despite how much money they've made for him over the years. Instead, that honor goes to a different bank.
Withdrawing a fortune
These days, Buffett's banking baby is Bank of America (NYSE: BAC). We shouldn't be surprised; this summer, Berkshire cashed out of a big stack of warrants it owned in the company, netting it 700 million common shares of stock, which made it the largest single shareholder. That move also produced an instant on-paper profit of $12 billion.
In a recent interview on CNBC, Buffett could barely contain his pride of ownership.
"What's your favorite bank?" interviewer Becky Quick asked him, point-blank.
"What's my favorite bank? Well, I'm not so s-- who's your favorite child?" he stalled, before blurting out: "Bank of America has done a sensational job under [CEO] Brian Moynihan."
Although "sensational" might be a bit strong, Buffett is generally on point about Bank of America's performance. The company has made commendable improvements in many facets of its operations during Moynihan's tenure, which began in the aftershock of last decade's Financial Crisis.
For example, in its most recently reported quarter, Bank of America proved that it was well on track to meet its goal of reducing annual expenses to $53 billion. Even though big chunks of its spending in years past consisted of Crisis-related legal expenses, this kind of slim-down isn't easy for a giant that spent over $70 billion a year just five years ago.
Bank of America has posted solid fundamentals of late, with Q3 being the latest in a string of good quarterly performances. Although total revenue didn't leap in the quarter, it did advance 1% year over year to $21.8 billion. More encouragingly, those efficiencies helped lift the bottom line by 15% to $5.1 billion and lift the all-important return-on-assets metric to 0.98% -- a hair's breadth from the bank's 1% goal.
Buy and hold, and hold, and hold, and...
Buffett intends to keep his banking baby at home until it grows up -- and perhaps even longer. He said in the CNBC interview that Berkshire "will be holders of B of A stock for a long, long, long time."
Ever cagey, the veteran investor rarely makes that kind of commitment publicly, so this pronouncement is meaningful. Bank of America still has plenty of potential as the economy continues to improve and the company skillfully trims costs.
On average, analysts estimate that the bank will improve its fiscal 2017 per-share profit by 21% (to $1.82), with revenue coming in 6% higher at $89.5 billion.
Those growth rates compare favorably to Wells Fargo's anticipated marginal decline in profit and incremental rise in revenue. They also top AmEx's anticipated 4% improvement in both net profit and revenue. Meanwhile, Bank of America's price-to-book value (a key ratio in an asset-heavy sector such as banking) stands at a relatively low 1.1; Wells Fargo's is currently 1.5, while AmEx's figure is 3.9.
Yes, we can anticipate that Bank of America will remain firmly anchored in Berkshire's portfolio well into the future. I imagine it'll also remain the sector stock most favored by proud Papa Warren.
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Eric Volkman has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Berkshire Hathaway (B shares). The Motley Fool recommends American Express. The Motley Fool has a disclosure policy.