Warren Buffett tours Berkshire Hathaway's annual shareholders meeting headquarters in Omaha, Nebraska.
David A. Grosjean | CNBC
Berkshire Hathawayled by legendary investor Warren Buffett, has been making secret bets on the financial industry since the third quarter of last year.
The identity of the stock – or shares – that Berkshire has snapped up could be revealed Saturday at the company's annual shareholders meeting in Omaha, Nebraska.
That's because unless Berkshire is given confidential treatment on the investment for the third straight quarter, the stake will be revealed in filings later this month. So the 93-year-old CEO of Berkshire may decide to explain his rationale to the thousands of investors flocking to the gathering.
The bet, shrouded in mystery, has captivated Berkshire investors since it first appeared in filings late last year. While Buffett was a net seller of stocks and lamented the scarcity of opportunities that could “really move the needle on Berkshire,” he clearly found something he loved — and in the financial realm, no less.
This is an area that has been re-engaged in recent years due to concerns about rising loan defaults. High interest rates have hurt some financial players like regional US banks, while making the yield on Berkshire's pile of cash in instruments like Treasury bills suddenly attractive.
“When you're the most important investor, people care about what you think is good,” said Bill Stone, chief investment officer at Glenview Trust, using an acronym for “best of the best.” “What makes it even more interesting is that banks fall under his jurisdiction.”
Under Buffett, Berkshire has outperformed the S&P 500 over nearly six decades with a compound annual gain of 19.8%, compared with a 10.2% annual rise for the index.
Coverage Note: The Annual Meeting will be broadcast exclusively on CNBC and streamed live on CNBC.com. Our special coverage will begin Saturday at 9:30 a.m. ET.
Veiled bets
Berkshire requested anonymity for the trades because if the stock became known before the group finished building its position, others would invest in the stock as well, sending the price higher, according to David Cass, a finance professor at the University of Maryland.
Buffett reportedly controls nearly 90% of Berkshire's massive stock portfolio, leaving the rest to his deputies, Todd Combs and Ted Wechsler, Cass said.
While investment disclosures don't give any idea what the stock could be, Stone, Cass and other Buffett watchers believe it's a multibillion-dollar bet on a financial name.
That's because the cost basis of banks, insurance companies and finance stocks owned by the company jumped by $3.59 billion in the second half of last year, the only category to increase, according to separate Berkshire filings.
Meanwhile, Berkshire exited financial names by divesting from insurance companies Markel And Globe LiveWhich led investors to estimate that the bet could reach $4 billion or $5 billion by the end of 2023. It is not known whether this bet is on a single company or distributed among multiple companies in the industry.
Schwab or Morgan Stanley?
If it were a classic Buffett bet — a large stake in one company — that stock would have to be large, perhaps with a market cap of $100 billion. Owning at least 5% of publicly traded US companies triggers 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.
Charles Schwab or Morgan Stanley It could fit the bill, according to James Shanahan, an Edward Jones analyst who covers banks and Berkshire Hathaway.
“Schwab took a beating during the regional banking crisis last year, and they had a problem where retail investors were trading their cash into higher-yielding investments,” Shanahan said. “No one wanted to own that name last year, so Buffett could buy as much as he wanted.”
– Other names that have been circulated – C. B. Morgan Chase or Black stonefor example, is possible, but may be less reasonable given valuations or business mix. TRUE Other high-quality regional banks may also fit Buffett's criteria, as would an insurance company American International GroupAlthough its market value is smaller, Shanahan said.
Buffett and the banks
Berkshire has owned financial names for decades, and Buffett has stepped in to inject capital — and trust — into the industry on multiple occasions.
Buffett served as CEO of scandal-plagued Salomon Brothers in the early 1990s to help turn the company around. He pumped $5 billion into… Goldman Sachs In 2008 and another $5 billion American bank in 2011, eventually becoming the latter's largest shareholder.
But after charging lenders in 2018, from global banks like JP Morgan to regional lenders like… PNC Financial And us bankIt significantly reduced its exposure to the sector in 2020 due to concerns that the coronavirus pandemic would punish the industry.
Since then, he and his deputies have mostly avoided adding to his financial stakes, beyond modest positions in Citigroup And Capital One.
“Fear is contagious”
Last May, Buffett told shareholders to expect more turmoil in the banking sector. Berkshire could deploy more capital into the industry, if needed, he said.
“The situation in the banking sector is very similar to what it has always been in the banking sector, which is that fear is contagious,” Buffett said. “Historically, fear was sometimes justified, and sometimes it was not.”
Wherever he places his bet, the move will be seen as a boost for the company, and perhaps even the sector, given Buffett's track record of identifying value.
It is unclear how long regulators will allow Berkshire to protect its moves.
“I hope he reveals the name and talks about the strategy behind it,” Shanahan said. “The SEC could get impatient, and at some point it will look like Berkshire is getting preferential treatment.”
— CNBC's Yun Li contributed to this report.
