Sticking With Two Buffett Banks

02/23/2009 1:00 pm EST


Jack Adamo

Editor, Jack Adamo's Insiders Plus

Jack Adamo, editor of Jack Adamo’s Insiders Plus, says two big banks in which Warren Buffett has invested should outperform their peers by a wide margin over time.

Wells Fargo (NYSE: WFC) and US Bancorp (NYSE: USB) are undoubtedly the two most solid of the large US banks.

We bought both Wells and USB based on the long-term support of Warren Buffett, who owns tons of each, and has said repeatedly that the companies are managed by the best chief executive officers in the business. You can be sure that Buffett is very clear about their financial condition and any problems they face.

Given the performance of the two stocks recently, one may be tempted to ask if The Wiz has lost his touch. Just as Buffett has said it has never paid to bet against America, it has never paid to bet against Buffett. His mistakes have been few and far between. Furthermore, the financial sector is his area of highest expertise.

In the late 1990s, many an editor, trying to make a name for himself, questioned Buffett’s wisdom and relevance in what they saw as the New Economy. He didn’t “get it,” they said. He didn’t understand technology, which is “where the money is.”

Yet somehow, through it all, the staid Dow Jones Utility Average soundly outperformed the Nasdaq Composite index and the Nasdaq 100 over their entire lives, and particularly so in the new millennium.

Moreover, although he doesn’t understand high tech, The Wiz understands balance sheets and cash flows. He made some incredible deals in distressed bonds in the tech sector during the tech crash. He garnered high coupon payments and high capital gains when he eventually sold or redeemed them.

So, I would not be too quick to assume again that Buffett has lost touch. Undoubtedly he got in too early on deals like Goldman Sachs (NYSE: GS) and General Electric (NYSE: GE), but remember, he’s getting 10% preferred dividends during a period when the market will be lucky to deliver a positive return at all.

The Oracle of Omaha has a longer time horizon than the average investor. He has said more than once that he wouldn’t care if they closed the stock exchange for five years at a time. [So,] we shouldn’t be surprised if these investments take longer to pan out than we’d like, but I’d be very surprised if they don’t outperform the market substantially over the next few years, even from our original buy prices.

I like USB better than Wells because it looks to me like USB is recognizing its losses in a more timely manner. Big players in the market appear to agree with me: USB is seeing strong buying on these price drops, whereas Wells is not. (Wells and USB closed below $10 Friday—Editor.)

I will be disappointed if there’s a dividend cut at either company, but I’m not worried about the safety of our money or the merit of the investment over a three- to five-year period. In this market, those are comforting thoughts.

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