Warren Buffett walks the grounds at the Berkshire Hathaway Annual Shareholders Meeting in Omaha Nebraska.
David A. Grogan | CNBC
Berkshire Hathawayled by legendary investor Warren Buffett, has been making a confidential bet on the financial industry since the third quarter of last year.
The identity of the shares (or shares) Berkshire has been acquiring could be revealed Saturday at the company's annual shareholder meeting in Omaha, Nebraska.
That's because unless Berkshire has been granted confidential treatment on the investment for a third consecutive quarter, the stake will be revealed in filings filed later this month. So Berkshire's 93-year-old CEO may decide to explain his reasons to the thousands of investors who flock to the meeting.
The bet, shrouded in mystery, has captivated Berkshire investors since it first appeared in disclosures late last year. At a time when Buffett has been a net seller of stocks and lamented the dearth of opportunities capable of “really moving the needle at Berkshire,” he has apparently found something he likes, and in the financial realm no less.
That's an area he's refocused on in recent years because of concerns about rising loan defaults. High interest rates have taken their toll on some financial players such as US regional banks, while making the yield on Berkshire's cash on instruments such as Treasury bills suddenly attractive.
“When you're the GOAT of investing, people are interested in what you think is good,” said Bill Stone, chief investment officer of Glenview Trust Co., using the acronym for “greatest of all time.” “What makes it even more interesting is that the banks are in their circle of competence.”
Under Buffett, Berkshire has trounced the S&P 500 for nearly six decades with a compound annual gain of 19.8%, compared with the index's 10.2% annual gain.
Coverage Note: The annual meeting will air exclusively on CNBC and broadcast live on CNBC.com. Our special coverage will begin Saturday at 9:30 a.m. ET.
Veiled bets
Berkshire requested anonymity for the trading because if the stock became known before the conglomerate finished building its position, others would also buy the stock, driving up the price, according to David Kass, a finance professor at the University of Maryland.
Buffett is said to control about 90% of Berkshire's huge stock portfolio, leaving his deputies Todd Combs and Ted Weschler the rest, Kass said.
While the investment disclosures don't give any clues about what the stock might be, Stone, Kass and other Buffett watchers believe it's a multibillion-dollar bet on a financial name.
That's because the cost base of banks, insurers and financial stocks owned by the company increased by $3.59 billion in the second half of last year, the only category that increased, according to separate Berkshire filings.
At the same time, Berkshire abandoned financial names as it divested from insurers. Markel and balloon lifeleading investors to estimate that the bet could amount to $4 billion or $5 billion through the end of 2023. It is unknown whether that bet was placed on one company or spread across several companies in an industry.
Schwab or Morgan Stanley?
If this were a classic Buffett bet (a big stake in a single company), that stock would have to be big, with perhaps a market capitalization of $100 billion. Holdings of at least 5% in publicly traded US companies trigger disclosure requirements.
Investors have been speculating for months about what the stock could be. Finance covers all types of businesses, from retail lenders to Wall Street brokers, payments companies, and various insurance sectors.
Carlos Schwab either Morgan Stanley could fit the bill, according to James Shanahan, an Edward Jones analyst who covers banks and Berkshire Hathaway.
“Schwab got beat up during the regional banking crisis last year, they had a problem where retail investors were shifting cash into higher-yielding investments,” Shanahan said. “No one wanted to own that name last year, so Buffett could have bought anything he wanted.”
Other names that have circulated: JPMorgan Chase either Black Rockfor example, they are possible, but may make less sense given valuations or business mix. Truista and other higher-quality regional banks could also fit Buffett's parameters, as could insurers. AIGShanahan said, although their market capitalizations are smaller.
Buffett and banks
Berkshire has owned financial names for decades, and Buffett has stepped in to inject capital (and confidence) into the industry on multiple occasions.
Buffett served as CEO of scandal-hit Salomon Brothers in the early 1990s to help turn around the company. He invested five billion dollars in Goldman Sachs in 2008 and another 5 billion dollars in Bank of America in 2011, finally becoming the largest shareholder of the latter.
But after accumulating lenders in 2018, from universal banks like JPMorgan to regional lenders like PNC Financial and US BankIt sharply reduced its exposure to the sector in 2020 over concerns that the coronavirus pandemic would punish the industry.
Since then, he and his deputies have largely avoided increasing their financial interests, apart from modest positions in citi group and capital one.
'Fear is contagious'
Last May, Buffett told shareholders to expect more turmoil in banking. He said Berkshire could deploy more capital into the industry if necessary.
“The situation in banking is very similar to what it has always been in banking, which is that fear is contagious,” Buffett said. “Historically, sometimes fear was justified and sometimes it was not.”
Wherever he made his bet, the move will be seen as a boost for the company, perhaps even the sector, given Buffett's track record in identifying value.
It's unclear how long regulators will allow Berkshire to hedge its moves.
“I'm hoping he reveals the name and talks about the strategy behind it,” Shanahan said. “The SEC's patience may wear thin; at some point it will appear that Berkshire is getting a favorable deal.”
—CNBC's Yun Li contributed to this report.
