Investing legend and Berkshire Hathaway (NYSE:BRK.A, NYSE:BRK.B) CEO Warren Buffett is an imperfect market timer. He famously sold his airline shares at the worst possible time. Is he making a similar mistake with his Wells Fargo (NYSE:WFC) shares? Or should retail traders follow Buffett’s lead and dump their Wells Fargo stock?
The purpose here is not to denigrate the Oracle of Omaha as he is still among the world’s greatest investors. Rather, we’re only trying to determine whether Berkshire’s sale of Wells Fargo stock is a compelling reason for other investors to sell their shares.
Adding insult to injury, a prominent analytics firm recently gave Wells Fargo’s credit rating a downgrade. Suffice it to say that this mega-bank isn’t in favor nowadays.
On the other hand, Buffett tends to buy assets during times of maximum pessimism. Therefore, it’s hard to know how to interpret his selling of Wells Fargo stock now. Let’s see if we can make sense of this and possibly even construct a case in favor of a long position.
A Closer Look at Wells Fargo Stock
Unlike technology and e-commerce stocks, big-bank stocks have mostly struggled to recover during 2020’s second quarter. Evidently, lenders are having a hard time convincing businesses to take out loans in the wake of the novel coronavirus pandemic.
Without a doubt, Wells Fargo stock reflects the financial sector’s problems. At the start of 2020, the shares were resting comfortably above $50. In early September, the stock was trading around half of that price.
If anything, this should present a compelling value proposition for a contrarian like Buffett. Wells Fargo stock has a very reasonable trailing 12-month price-to-earnings ratio of 26.71. Moreover, the stock offers a decent forward annual dividend yield of 1.63%.
What I’m about to reveal will almost sound like a betrayal as Buffett has a long-standing relationship with Wells Fargo stock. In fact, Buffett started investing in Wells Fargo way back in 1989.
But that was then, and this is now. In 2020, Buffett and Berkshire have been slashing their stake in Wells Fargo stock. Notably, the company sold off 85.6 million Wells Fargo shares during the second quarter after having already reduced its position.
Now, we have another Berkshire bombshell. A form filed with the U.S. the Securities and Exchange Commission (SEC) revealed that after the end of 2020’s second quarter, Berkshire Hathaway sold approximately 100 million Wells Fargo stock shares.
Loving the Unloved
Granted, that’s a whole lot of shares. What retail traders need to bear in mind, though, is that large institutional investors sell stocks for various reasons. Sometimes they’ve held their shares for years and just want to take profits.
Or, maybe they still like a company but see an even better deal elsewhere. Consequently, they may sell shares of one stock in order to free up capital to buy a different stock.
There’s no need to jump to conclusions as Buffett hasn’t revealed why Berkshire sold those Wells Fargo shares. And the share sale doesn’t change the fact that Wells Fargo remains the fourth-largest bank in the U.S. in terms of assets.
Still, it surprises me that Buffett would sell the Wells Fargo shares now. Personally, I see this stock as a perfect “buy during maximum pessimism” opportunity. For instance, Moody’s just reduced its credit rating on Wells Fargo from “stable” to “negative.”
Now, that’s what I call pessimism. And we’re not talking about a nano-cap company that’s likely to go out of business. This is a mega-bank with deep capital reserves whose stock is selling at a bargain-basement price point.
The Bottom Line
For all we know, Buffett might have a perfectly valid reason for selling so many of his Wells Fargo stock shares. We shouldn’t generalize his sale and assume that Buffett’s motives apply to all of us.
Nor should we purposely buy Wells Fargo stock as an act of defiance. Instead, we can view the shares as an opportunity to own part of a banking giant that’s deeply out of favor.
And that, my friends, is a Buffett bet if I ever saw one.