Why Did Buffett Sell JPM?

JPMorgan Chase & Co. (NYSE:JPM) is one of the largest banks in the world by assets. Over the past decade, it showed continuous growth to reach a market capitalization over six times higher than the lows experienced during its $25 billion bailout in 2008.

Although the company faced a flurry of fines throughout the decade, it managed to continue growing revenues and profitability. This caused billionaire investor Warren Buffett to build an $8 billion stake in the banking giant. In 2019, he famously lamented not buying into it sooner.

By the third quarter of 2020, the company reported $9.4 billion in income, or $2.92 per share. It held nearly $1 billion in cash at the turn of the the year.

Good news continued coming in December as the Fed “greenlit” stock buybacks after both JPMorgan (JPM) and Goldman Sachs (GS) passed its stress tests. Unfortunately for Buffett, he didn’t benefit from these increases.

That’s because he sold most his stake in JPMorgan Chase by the end of the third quarter. By December, Berkshire Hathaway held less than 1 million shares, down from 59 million shares owned at the end of 2019. By the end of the second quarter, it was down to 22.2 million and could be gone by 2021.

That begs the question of why Buffett sold JPM stock and whether it’s a good investment for anyone else.

Why Did Buffett Sell JPM Stock?

JPMorgan Chase manages over $3.2 trillion in assets, making it one of the largest banks by assets in the world. It showed tremendous growth throughout the 2010s, but stress test or not, Buffett sees too many clouds on the horizon of CEO Jamie Dimon’s business.

First there’s the pandemic – unemployment reached record highs, and government stimulus is arguably the only thing keeping the economy afloat in 2021. When these stimulus provisions fall off, banks will likely feel the squeeze.

There’s also the Fed lowering interest rates. Lower rates mean tighter margins while the company grapples with the effects of the pandemic on its staff and customers.

And then we have FinTech companies like PayPal (PYPL) and Square (SQ). These financial industry innovators experienced massive growth in the 2010s that exponentially increased so far this decade.

They’re experiencing historic high market valuations while JPMorgan failed to eclipse its share price highs. And losing a massive whale investor like Buffett is likely to weigh on the stock. It’s not as big a shareholder as Vanguard Group nor BlackRock, but it’s still a large enough share to matter.

In fact, Buffett still owns a sizable stake in the company.

Does Buffett Own JPM Now?

Berkshire Hathaway still owns almost 1 million JPM shares as of the start of the year. This is still more than Dimon, who owns 631,998 shares and is the largest internal stakeholder.

While the media buzz surrounds him selling stakes, those million shares still represent Buffett’s confidence in JPMorgan. He initially bought the stakes in 2018 and soon expressed remorse for not investing sooner.

Still, Buffett shored up his investment in rival Bank of America (BAC) by investing another $2 billion in it while withdrawing from JPMorgan Chase. This signals his disinterest in any potential headwinds and fears that the company will fail to sustain growth during an unstable 2021 economy.

There’s a chance the full investment will be reduced to zero by year end, and JPMorgan’s stock buybacks will help balance the market from this massive increase in available shares.

But are there still JPM buyers left, and are they making a good investment?

Is JPM Stock A Good Investment?

Despite Buffett’s change of heart, JPMorgan was praised by most analysts and investors throughout 2020.

The company couldn’t buyback stocks or raise its dividend in 2020 without Fed approval, and it received that approval by year end 2020.

It also already set aside $34 billion to cover losses from loans defaulting due to nonpayment and other reasons in the aftermath of the faltering economy.

The banking giant remains a titan of finance with a market capitalization hovering around the $400 billion mark, and a P/E ratio of almost 16x. This compares to Bank of America’s $250+ billion market cap and P/E ratio of 14x.

The company’s share prices dipped to a 52-week low of $76.91 when the rest of the market fell. It soon recovered but failed to reach new highs as tech stocks did.

It pays an annual dividend of $3.60 made in quarterly cash payments of $0.90. This creates a healthy annual dividend yield of 3.02 percent.

The company makes money as both a consumer and investment bank, and this gives it plenty of growth potential. Its existing assets give it an advantage over newer companies, and it hopes to continue growing revenues and profits.

The big question is whether JPM is a better investment than Square or other Fintech disruptors, and that’s uncertain. These other companies could be at their height, or we could be witnessing a changing of the guard as newer companies take the financial throne.

Either way, Buffett is throwing in the towel.

Why Did Buffett Sell JPM: The Bottom Line

Warren Buffett jumped into JPMorgan Chase in 2018 and spent the next two years telling anyone who would listen how he regretted not investing earlier. That tune did a complete about-face during the pandemic when economic times got tough.

Traditional banks like JPMorgan suffered during the crash, with government stimulus guidelines preventing foreclosures while the country reach unemployment highs.

FinTech companies like PayPal and Square overtook the banks by having the right tools for a socially distant society. When the economy returns to normal, it’s unclear how it will affect both sides of this coin.

Regardless of who comes out on top, Buffett has pulled his money out of JPMorgan and most other banks (besides Bank of America). He put it somewhere he understands better, investing in gold and natural gas.

Time will tell if this was a smart move, as JPMorgan passed the Fed stress test and looks to continue a growth path over the next year.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.