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Warren Buffett Rests as John Paulson Digs In (Update 1)

Stocks in this article: HIG BRK.A BRK.B WFC BAC

Many of Buffett's largest bank holdings surged in March after receiving Fed approval to increase capital return plans, making the value investor poised to see big bank investment returns over the long-haul even if shares falter after a 2012 rally.

In his February annual letter, Buffett detailed his math on how to gain on stock swoons and share repurchases, using his investment in IBM (IBM) as an example. After Wells Fargo boosted its dividend 83% and indicated accelerated buybacks on the heels of stress test results, Buffett's largest bank holding may have a similar thesis, with a relevance to other Berkshire Hathaway (BRK.A) investments in Bank of America, American Express and U.S. Bancorp.

On Wednesday, Guggenheim Partners analyst Marty Mosby maintained "buy" ratings on large Buffett bank investment like Wells Fargo, U.S. Bancorp, in addition to JPMorgan (JPM) on capital return programs and an expected growth in corporate and mortgage lending. "WFC, JPM, and USB are high-quality large cap banks that continue to appreciate off of earnings momentum and deployment of excess capital," wrote Mosby.

If bank buyback's were to play out similar to an expected $50 billion share buyback program launched by IBM, it could be the basis for consistent earnings outperformance by Berkshire Hathaway relative to the S&P 500 Index. In 2011, Berkshire saw its book value per share grow 4.6%, outpacing a 2.1% boost to S&P 500 components that includes dividends, reversing a trend of postcrisis underperformance for Warren Buffett's financial empire.

As of 2011, Berkshire's compounded annual gain of 19.8% more than doubled the S&P 500's 9.2% gain, since the fund's inception in 1965, according to its February letter.

Will Paulson's activist investment strategy in Hartford Financial Services give him the lift he needs to make back ground on Buffett's 2012 financial sector returns? It's unlikely.

"As the largest investor in the Company for the past year, we have done exhaustive research on the challenges and opportunities of The Hartford and believe that a spinoff would produce an increase in value for Hartford shareholders of 40 -- 60%+ above the unaffected share price," wrote Paulson in his Valentine's Day letter to Hartford Financial Services Chief Executive Liam McGee.

"We would hope that a newly incentivized Life management running a pure Life company would take steps to further improve the separately traded Life's value," added Paulson, who said that other large companies like ConocoPhillips (COP), Kraft (KFT) and McGraw Hill (MHP) have undertaken similar strategies recently. The possible sale of The Hartford's life insurance units instead of a shareholder spin, indicate that management didn't fully heed Paulson's advice.

Even if he were to impart his will and big stock gains on Hartford Financial Services, they likely wouldn't cover the missed opportunities on big bank stock buyback programs that Buffett's capitalized on in 2012.

>>View John Paulson's Portfolio

TheStreet Ratings gives Hartford Financial Services Group a B- grade and a $25.06 price target.

-- Written by Antoine Gara in New York

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