A 'Sector Rotation' Play That Warren Buffett Would Love

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) , 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.

Wells Fargo is a holding in Jim Cramer's Action Alerts PLUS Charitable Trust Portfolio. See how Cramer rates the stock here. Want to be alerted before Cramer buys or sells WFC? Learn more now.

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) 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) 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%.

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