Why Did Buffett Sell Wells Fargo?

Wells Fargo & Co (NYSE:WFC) had a rough decade. After barely recovering from the financial crisis, the company got hit in a series of expensive scandals. From force-placing insurance on collateral loans to opening fraudulent accounts, it became the mascot for bad banking practices.

Berkshire Hathaway, Warren Buffett’s investment holding company, was one of the company’s biggest shareholders for over 30 years. It owned over 13 percent of the bank in 1994 and held 500 million shares by 2016.

Now Buffett owns fewer than 140 million shares, its smallest stake in the company since 2003. That has investors wondering why did Buffett sell Wells Fargo?

The banking industry failed to recover from the mass migration from offline business to online in 2020. Traditional banking shares slumped while banking alternatives from PayPal (PYPL) to Square (SQ) soared to record highs.

This could be a signal of a changing market, and as much as Buffett understands money, he has shunned technology investments for the better part of his investing career.

Warren Buffett is a boomer, and Wells Fargo might yet prove to be a legacy for a different era. 

Why Did Buffett Sell Wells Fargo Stock?

Analysts have several theories as to why Buffett sold his Wells Fargo stake down. Much of the speculation revolves around his fundamental disagreement with the bank’s board, which hired Wall Street insider Charles W. Scharf as CEO in October 2021.

Prior to Wells, Scharf was CEO of both Visa and BNY Mellon. Of these companies, only Visa recovered to prior high trading levels. 

Buffett, analysts surmise, believes the bank needs an outsider to clean up its culture of corruption.

Washington D.C. has Wells Fargo in its crosshairs at a time when the economy is headed on a new trajectory. Digital currencies and contactless payments escalated a scenario that was disrupting the traditional banking structure in the 2010s.

When comparing the recovery of Wells Fargo to other Berkshire investments like Apple (AAPL) and Costco (COST), it’s easy to see why Buffett has little hope for its quick recovery. It could be another decade before the banking giant returns to its former glory.

The days of the “too big to fail” banks could soon be in the rearview mirror, thanks cryptocurrencies and financial technology companies that serve the unbanked and underbanked populations. The pandemic widened the income gap, and Wells Fargo, with its “insider” CEO, could be ill-prepared to adapt.

Most likely, this fundamental disagreement about recovery is what caused Buffett to pull out. Nevertheless, he didn’t fully divest his holdings.

Does Buffett Own Wells Fargo Now?

Buffett still owns a stake in Wells Fargo through Berkshire Hathaway. His stake was reduced to 3.3. percent, which comes out to 140 million shares. So, even though he owns less, Buffett still has a sizeable interest.

Most likely, he still believes in financial businesses that have enormous brand value, like Wells Fargo and Bank of America, which he also owns. 

In fact, prior to the $3 billion fine for its fake banking scandal, the previous biggest fine was for the bank’s partnership with Assurant for force-placed insurance. Wells Fargo was fined $385 million for force-placing insurance policies in 2019, and Assurant is the force-placed insurance market leader.

Insurance will likely take a hit in the coming years as the foreclosure and eviction moratoriums fall. And hurricane season hits won’t do insurers any favors too.

Insurance has a degree of cyclicality, and loss ratios can be heavily impacted by economic slumps. This means Berkshire needs extra cash on hand, which could be why Buffett is selling so much stock across the board to shore up cash reserves for his re-insurance business unit.

But does that mean Wells Fargo is no longer a good buy?

Is Wells Fargo Stock a Good Investment?

Wells Fargo had a market capitalization over $120 billion heading into 2021. That represented an earnings multiple of around 80x.

In 2020, WFC share price crashed from highs of $55 to lows in the $20-$30 range – and its lowest point wasn’t even during the “coronavirus crash.”

Its share price low of $20.76 occurred in the run-up to the November election. And this is a range the company traded at during the 2007 foreclosure crisis when it received a $25 billion government bailout.

While it had a bull run in the early 2010s, it struggled in the back half due to a wide range of fines and class action lawsuits caused by numerous scandals.

This bottlenecked the company’s growth and gave market share to rivals like JPMorgan Chase (JPM) and Bank of America (BAC), which Buffett and other investors have more confidence in.

Although Buffett sold most of his traditional banking stocks, he did keep BofA. Meanwhile, he sold down stakes in JPMorgan (JPM) and Wells Fargo, perhaps seeing limited growth potential.

The stars of the 2010 financial industry aren’t traditional banking stocks though. PayPal CEO Daniel Schuman and Square CEO Jack Dorsey represent a new breed of Fintech moguls.

Traditional banking struggled to rebound from the pandemic, but cryptocurrencies and contactless payment options like Cash App experienced massive growth. This could signal a changing of the guard and further consolidation of the formerly “too big to fail” banks.

Why Did Buffett Sell Wells Fargo: The Bottom Line

Warren Buffett was a major stakeholder in Wells Fargo for over 30 years. While his 140-million-share stake is nothing to sneeze at, it’s all that’s left after a major 2020 sell-off. The move was made after the stock remained stagnant for much of the year, even crashing below support levels by year end.

The beleaguered company faces more regulatory heat after a tough decade, and installing another traditional banker at the helm gave Buffett reason to pull out.

He still has a reduced stake in the bank, but even a boomer like Buffett sees the writing on the walls of the traditional banking industry.

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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.