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Warren Buffett Shuns Investment Banks, Embraces Wells Fargo

While JPMorgan has gained over 17% since then, the Bloomberg data shows that Buffett financial sector picks like Wells Fargo, US Bancorp, M&T, American Express, Visa and MasterCard have dramatically outperformed those returns. Wells Fargo is up over 30% since May 2009, US Bancorp and M&T have posted over 50% share gains and American Express has doubled. Recent new Buffett financial sector picks like Visa and MasterCard are among the financial sector's best performers in the past 12 months, posting 40%-plus gains to go against the Financial Select Sector SPDR's (XLF) 2% share loss.

The data should tell investors that in spite of the press given to capital markets players with volatile earnings and recently battered share prices, they may be better off following Buffett into less glamorous banks stocks that are exposed to consumer and mortgage lending growth, and credit card names that may track rebounding consumer spending.

Fundamental investors may also have reason to follow Buffett, even if it's less obvious whether superregional banks are a value investment. Following the results of the U.S. Federal Reserve stress tests in March, it was many of Buffett's investments like Wells Fargo, U.S. Bancorp and American Express, which led the way on share buyback plans and dividend boosts. Wells Fargo boosted its dividend 83% and indicated accelerated a buyback program launched in 2011. American Express unveiled a $5 billion buyback program and upped its quarterly dividend. Meanwhile U.S. Bancorp boosted its dividend by 56% and targeted $3.3 billion in buybacks.

In buying back stock, banks will lower total outstanding shares thus boosting the proportion of earnings attributable to remaining shares. Using IBM (IBM) as an example, Buffett explained in his annual letter in February how share buybacks can be a hedge to the prospect that a company's shares underperform.

"When Berkshire buys stock in a company that is repurchasing shares, we hope for two events," Buffett explained. "First, we have the normal hope that earnings of the business will increase at a good clip for a long time to come; and second, we also hope that the stock underperforms in the market for a long time as well." As a result, Buffett has a fundamental reason not to be concerned if the stock performance of IBM and Wells Fargo - both among his largest holdings with buyback plans - underperform in the near term.
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