The Oracle of Omaha had a busy quarter.
According to his latest 13F filing, Warren Buffett has deployed about a third of his cash into new investments in the first three months of the year.
As always, Buffett’s biggest swings are standouts. However, his decision to sell most bank stocks while adding Citigroup (C) to Berkshire Hathaway’s (BRK) portfolio is confusing Wall Street.
Here is why this contradiction has attracted so much attention.
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Eager to escape the dreary stock market? Unfortunately, “Silver is not a safe investment”, says Ray Dalio, founder of the largest hedge fund in the world. “It’s not a safe place because it will be taxed by inflation.” With the consumer price index hitting a 40-year high of 8.6% in May, you’ll need to be creative to find strong returns.
Buffett loves banks
Buffett is very familiar with banking and financial services. He thinks the business is relatively simple and can be extremely lucrative if managed well.
“If you can just avoid following fads and really do a lot of bad loans, banking has been a remarkably good business in this country,” he told investors at Berkshire Hathaway in 2003.
What about the 2008 global financial crisis? Buffett went on a shopping spree during this period, taking stakes in JP Morgan (JPM) and Goldman Sachs (GS).
For several years, the big banks were the largest holdings in Berkshire’s portfolio. In 2009, he even called Wells Fargo (WFC) his most compelling investment.
“If I had to put all my net worth into one stock, it would be the stock,” he told Berkshire shareholders.
Catch Buffett on the rebound
This year, Buffett has completely abandoned all of these investments. Only a few banks remain in the portfolio.
That doesn’t mean the love affair with financial services is over.
In fact, Buffett added a new bank to his collection this year: Citigroup. During the first quarter of 2022, he added 55 million shares of Citigroup to Berkshire’s portfolio.
The stake is now worth $2.5 billion, making it the 16th largest stake in the basket.
The bet appears to rest on a turnaround story.
The transformation of Citigroup
Citigroup has lagged behind its peers. Over the past five years, the stock has fallen more than 28%.
Compare that to Bank of America’s 37% return over the same period. Even the SPDR S&P Bank ETF (KBE) is up 1.9%.
The company is now attempting a turnaround to catch up. Last year, Citigroup’s board appointed Jane Fraser as CEO, making her the first female leader of a major U.S. bank.
Fraser’s strategy is to focus on the most profitable segments of the business. Citigroup is selling or closing operations in Mexico, Australia, the Philippines, South Korea and elsewhere.
Citi stock did not fully reflect this new strategy.
An undervalued opportunity?
Citigroup shares currently trade at a price-earnings ratio of 5.6. Its price-to-book ratio is 0.52. This is significantly below the industry average of 9.45 and 1.12 respectively.
Simply put, stock is cheap.
If the new management team can streamline operations and increase profitability, the bank’s valuation could catch up with that of its peers.
Meanwhile, a rising interest rate environment should provide another tailwind.
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This article provides information only and should not be construed as advice. It is provided without warranty of any kind.