For more than three decades, Warren Buffett has stuck with Wells Fargo (NYSE: WFC). The market has expected Warren Buffett to sell his shares in the bank due to its numerous problems, including a fake account scandal, overcharging of foreign exchange customers, and increased expenses. So, it's likely that the Oracle of Omaha has had enough.
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On Monday, Berkshire Hathaway (NYSE: BRK.A),Warren Buffett's investment company, disclosed that it no longer has any stake in Wells Fargo. The conglomerate recently filed its holdings with the Securities and Exchange Commission (SEC). What's interesting about this is that despite the reveal, shares of Wells Fargo made a jump on Tuesday. But how long can they hold? We'll only wait and see.
The sell-off wasn't sudden. It's been in the picture for quite a time now. Berkshire Hathaway has been cutting its stake in Wells Fargo since 2019. As a result, investors have been pressuring Warren Buffett to sell all of his shares in the company. They argued that these problems stained Berkshire Hathaway's reputation. Warren Buffett is known for dealing with firms with a good reputation.
But why did Buffett cut ties with Well Fargos and what lessons are there for investors with this financial decision made by the Oracle of Omaha?
The Real Reason Why Waren Buffett Dumped Wells Fargo
Wells Fargo (NYSE: WFC) was part of Berkshire Hathaway's top 3 holdings. He invested in the company three decades ago and has stuck with it despite its scandals. Warren Buffett has decided to throw in the towel. Some of the issues and problems the bank's CEO is grappling with include legacy regulatory problems and inefficiencies, including job cuts and potential business sales.
The CEO, Charlie Scharf, has a Wall Street background. Before his hire, Warren Buffett repeatedly told the bank not to hire an executive from Wall Street even though Scharf’s track record is commendable. He has a reputation for making consumer-facing businesses thrive and grow with technology. He has had stints with JPMorgan Chase & Co. and Bank of New York Mellon Corp. But when Scharf decided to work from New York and not from the bank’s San Francisco headquarters, Warren Buffett said it was “outrageous.”
Also, it is noticeable that since the pandemic struck, Warren Buffett has been treading cautiously on his investments. Recently, he lost about $15 billion when he sold off his stakes in other banking companies like JPMorgan Chase (NYSE: JPM) and the Goldman Sachs Group (NYSE: GS). Warren Buffett has not failed to capitalize on opportunities existing in the stock market since the pandemic. It would be worth noting that Wells Fargo's shares jumped one day after he divested the stock.
But contrary to expectations, Warren Buffett is not significantly reducing his exposure to the financial sector because after selling Wells Fargo, he went on to invest in other big banks. For example, he recently purchased 55 million shares in Wells Fargo's rival, Citigroup (NYSE: C). The investment is worth $3 billion at the time of the buy. He also has significant stakes in other big banks such as Bank of America (NYSE: BAC)and American Express (NYSE: AXP).
So, Wells Fargo would be seen only as a matter of an investment not aligning with his investment principles.
Wells Fargo Though Is Still A Good Investment
Although recent earnings reports have been disappointing for the big bank, the bank's future is still looking up. For one, earnings have been consistently beating estimates. Recently, this figure went down due to the significant release of reserve capital. The bank previously reserved this capital for pandemic loan losses that eventually did not occur. As a result, revenue was high, but it missed estimates. Unfortunately, its expenses were high for Q1 2022. The higher expenses were due to the seasonality of its business.
But management issued guidance that included paring expenses for 2022 to $51.5 billion. Expenses are dragging on revenue. Apart from that, the report was a good one for the bank, and this week, its share has jumped 4% after two days of trading.
Wells Fargo is a stock you can buy and hold.
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