Warren Buffett has a long standing reputation for not making stock recommendations, particularly in cases where Berkshire holds positions. I believe that this long standing policy has been in place primarily for two reasons, each of which has been very important to his success and reputation over time. First, Buffett obviously does not want to tip his hand if he is interested in buying or selling a stock. Second, Buffett knows that a large number of investors follow his every word and he does not believe in making recommendations that others may immediately act upon without due diligence.
CNBC Interview on March 9
On March 9, 2009, Warren Buffett was interviewed by CNBC on a wide range of topics related to the overall economy as well as his investment portfolio. Buffett made a number of comments related to two very important investments in the Berkshire Hathaway portfolio: Wells Fargo and American Express. Let’s examine what he said and whether this constitutes a buy recommendation.
Buffett’s comments on Wells Fargo were certainly positive when taken as a whole. He indicated that the costs of funds for Wells Fargo (as well as other banks) provide opportunities for banks to “earn their way out” of their current troubles. However, he also made a comment about banks potentially being forced by the government to issue significant amounts of stock at low valuations. Here are a few excerpts from the interview (the full text can be obtained by clicking on the link provided above):
… the average cost of funds for Wells Fargo, for example, the fourth quarter last year, was 1.44 percent. I can earn money with money at 1.44 percent. I mean, it’s cheap. It’s abundant and the spreads are terrific.
Now, if I looked at the performance of Wells Fargo, we’ll say, I see that, you know, in a couple years–and management doesn’t have anything to do with what I’m saying here. I–these are not from them. But I would expect $40 billion a year pre-provision income. And under normal conditions I would expect maybe 10 to $12 billion a year of losses. I mean, you lose money in banking. You just try not to lose too much. So, you know, you get to very interesting figures. I mean, the spreads are enormous on what they’re doing. They’re getting the money at bargain rates. So I–if there were no quote on Wells Fargo and I just owned it like I own my farm, I would look at the way the business is developing, and I would say, you know, it’s–`These are a couple of tough years for losses in the banking business, but you expect a couple tough years every now and then.’ And that the earning power is never–is going to be greater by far than it’s ever been when you get all through with it. The only worry in that is the government will force you to sell shares at some terribly low price. And I hope they’re wise enough not to do that.
…if we own US Bancorp, which we do, or Wells Fargo, their prospects three years out have been better than ever.
Readers can judge for themselves whether these comments constitute a buy recommendation on Wells Fargo. I cannot help but think that this does given the strong nature of the comments and particularly the context in which they were stated. If so, this is a remarkable development.
The statement on American Express seems even stronger to me, and Buffett implies that he is not buying more primarily due to restrictions related to the fact that American Express recently converted to a bank holding company.
American Express, for example, you know, it’s very clear that American Express’ losses in 2009 on their receivables will be, you know, considerably higher than last year. And their earnings will suffer to some degree accordingly. But that doesn’t mean that American Express isn’t a hell of a buy at $10. American Express is going to be around forever. They’ve got the cream of cardholders. Unfortunately, they have some cardholders that aren’t the cream, too.
If you own over 10 percent of it–if you own over 9.9 something percent of a bank holding company, you need the permission, I believe, of the Federal Reserve to buy another share. So they–they’re becoming a bank holding company I believe. As I understand the law, it precludes us buying another share of that because we are at that percentage already.
Buffett seems to clearly imply that American Express is a solid buy at $10. Of course, since making that statement, American Express stock has risen to some extent probably due to the huge market rally on March 10 as well as Buffett’s bullish comments.
Did Buffett Tip His Hand?
What should we conclude from these apparently bullish comments from Warren Buffett? I think that he clearly believes that both Wells Fargo and American Express are good bargains at current levels and, since Berkshire cannot purchase additional shares due to bank holding company restrictions, he does not feel like sharing these views will adversely impact Berkshire shareholders. I have not personally purchased either stock given my existing indirect holdings through ownership of Berkshire Hathaway stock.