Call it the last gasp of an aging bull market: "sector rotation." This occurs when the market leaders falter and become laggards, while the laggards become the new leaders.
By purchasing shares of Wells Fargo (WFC) - Get Report , you can score a trifecta: tap into sector rotation, defend your portfolio against a dying bull market, and enjoy the robust total returns of Warren Buffett's favorite bank stock.
Bull runs often are driven by a relatively small number of strong stocks that are market leaders. When these stocks begin to decline, it usually means that the broader indices will follow.
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Indeed, the markets performed a 180-degree pivot halfway through 2016, with the leaders of the first half turning into laggards as the year wore on. In particular, the telecom, utilities and real estate sectors went from positive to negative territory, as greed replaced caution. First-half laggards such as technology and financial services are now outperforming.
The most stunning rotation was executed by financial services, as traders reacted to unexpectedly strong earnings reports, an imminent interest rate hike, accelerating economic recovery and rising energy prices. Higher rates make it easier for banks to generate profits, while rising oil and gas prices ameliorate the energy sector debt on bank balance sheets.
During the first six months of 2016, the benchmark Financial Select Sector SPDR ETF (XLF) - Get Report declined 2.2%. However, in the five months since then, this ETF has soared, and it's now up more than 14% year to date.
One of the most appealing sector rotation plays right now is Wells Fargo. The Oracle of Omaha's personal portfolio and his holding company Berkshire Hathaway (BRK.A) - Get Report are heavily weighted toward the financial sector, Wells Fargo in particular.
Berkshire owns nearly 470 million shares of Wells Fargo, a 9.5% stake. Buffett personally owns two million shares of Wells Fargo. Neither Buffett nor Berkshire sold a single Wells Fargo share during the bank's recent scandal, even as nervous investors pummeled the stock's price. Since new management took over the bank on Oct. 12, Wells Fargo shares have risen nearly 14%.
Wells Fargo is a leader in the U.S. mortgage market, which continues to recover as the economy expands and unemployment declines. That said, the bank also is diversified and provides wealth management and brokerage services, two segments with high margins.
Wells Fargo holds more than $1.9 trillion in assets, which it's able to fund at a lower cost than its competitors because of its ability to attract low-cost deposits. The bank also is adroit at customer cross-selling and has become a powerhouse in mortgage lending, which will hold it in good stead as the housing market and construction activity continue to grow. Meanwhile, the bank's new reform-minded management is putting the scandal over fake customer accounts in the rear view mirror.
Wells Fargo's annualized return on assets of 1.21% is the hallmark of consistently strong financial performance. The dividend yield is a solid 3.0%. Despite the recent run-up in the stock's price, Wells Fargo still trades at a reasonable trailing 12-month price-to-earnings ratio of 12.8, less than money center peers JPMorgan Chase (13.51) and Bank of America (14.85), and lower than the industry average (15.8).
There's an old adage on Wall Street: Don't fight the trend. Profit from today's unfolding trend of sector rotation, via Warren Buffett's preferred banking play. You'll also gain "defensive growth" as a bulwark against a bull market that's losing steam.
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John Persinos is an investment analyst at Investing Daily. At the time of publication, he owned stock in Wells Fargo. Persinos appears as a regular commentator on the financial television show "Small Cap Nation." Follow him on Twitter.