First off the rank are the big banks, including JPMorgan Chase & Co (NYSE: JPM), Morgan Stanley (NYSE: MS), and Wells Fargo & Co (NYSE: WFC).

Corporate earnings

In recent weeks, forecasters have become increasingly pessimistic about US corporate earnings. For the first quarter of 2025, analysts now expect growth of 6.7% for the S&P 500 companies, according to Bloomberg. When Trump was first elected back in November, this number sat around 11%. 

For the full year, analysts expect profits to rise 9.4%, which is materially lower than the projected 12.5% at the beginning of the year. 

Investors will also be paying close attention to forward guidance. Management is likely to come under the microscope during the investor calls as analysts interrogate them on the potential tariff impact and broader consequences for the global economy. 

In particular, JP Morgan's earnings and investor call will be closely watched. CEO Jamie Dimon was the first CEO of a major bank to publicly address Trump's tariffs. 

In his 7 April annual letter to shareholders, he wrote:

Whatever you think of the legitimate reasons for the newly announced tariffs – and, of course, there are some – or the long-term effect, good or bad, there are likely to be important short-term effects. We are likely to see inflationary outcomes, not only on imported goods but on domestic prices, as input costs rise and demand increases on domestic products. Whether or not the menu of tariffs causes a recession remains in question, but it will slow down growth.

This reflection is especially noteworthy, given that he had initially dismissed the potential long-term impact of tariffs. Now that Trump has paused retaliatory tariffs for all countries except China, investors will be interested to hear whether these changes impact Jamie Dimon's assessment of the economy.

A big month ahead for US-focused ASX ETF investors

The Magnificent Seven companies will report their earnings towards the end of the reporting season (late April and early May). These companies represent a large portion of the S&P 500 Index (SP: .INX) and the Nasdaq Composite Index (NASDAQ: .IXIC). Therefore, investors in US-focused exchange-traded funds (ETFs) such as the iShares S&P 500 AUD ETF (ASX: IVV) and the BetaShares Nasdaq 100 ETF (ASX: NDQ) will be paying close attention. 

Tesla (NASDAQ: TSLA), which is due to report on 22 April, is likely to attract major interest. After taking a role in the Trump administration earlier this year, Tesla CEO Musk will be under the spotlight. This week, Musk also appeared to break with Trump by endorsing free trade between America and Europe. This should make for an especially eventful Tesla earnings call. 

Another company likely to attract strong interest is Apple Inc (NASDAQ: AAPL). The iPhone maker is scheduled to report on 1 May. Apple produces more than 90% of its products in China and has been under the microscope since Trump announced his tariffs. This week, the company briefly lost its spot as the world's largest listed company as its shares took a hit. However, it has since reclaimed its spot. Investors will be tuning in to see what CEO Tim Cook has to say.

One of the last companies to report is Nvidia Corporation (NASDAQ: NVDA). The chip maker will report on 28 May. After appearing unstoppable for the past few years, Nvidia's stock price has been on a roller coaster this year. It was down nearly 40% for the year to date before regaining 19% on Wednesday night. Investors will be keen to hear CEO Jensen Huang's views on DeepSeek and any potential tariff impact. 

Foolish Takeaway

There's been no shortage of action on US markets in recent weeks. This should set the stage for an especially interesting reporting season. Over to the banks!

The post US reporting season kicks off tonight appeared first on The Motley Fool Australia.

While the California-based chip designer was certainly not an unknown and had many admirers, few would have predicted that it would go on to surpass Apple (NASDAQ: AAPL) and become the world's most valuable company last month.

And while a pullback in December means that it has now given back this crown to the iPhone maker, this doesn't make its last five years any less impressive.

Why have Nvidia shares be charging higher?

A key driver of Nvidia's impressive ascent has been the emergence of ChatGPT and generative artificial intelligence (AI).

Seemingly out of nowhere in November 2022, ChatGPT was launched by OpenAI and showed the world just how revolutionary AI could be.

Soon after launch, the generative AI chatbot quickly became the fastest-growing consumer app in history by achieving a staggering 100 million monthly active users within two months.

This was great news for Nvidia because its graphics processing units (GPUs) and other chips are well suited to make demanding applications like ChatGPT run. As a result, this has put a rocket under demand for its chips and underpinned stellar revenue and earnings growth.

But what has it done for investors that put money into Nvidia shares five years ago? Let's find out.

$5,000 invested

Firstly, it is worth noting that Nvidia has undertaken two stock splits during the past five years.

As a result, the real price that investors would have paid to buy its shares in 2019 will be different to the adjusted price. However, everything else remains the same (returns etc).

Five years ago, investors could have picked up Nvidia shares for the equivalent of US$5.98 per share.

This means that with a US$5,000 investment, investors would have ended up with 836 shares in their portfolio.

As of Thursday's close on Wall Street, the Nvidia share price was changing hands for a lofty US$130.68.

This means that those 836 shares now have a market value of approximately US$109,250.

That's almost US$105,000 more than they started with. In fact, their original US$5,000 investment accounts for just 4.6% of their holding now. The rest is pure profit.

The good news is that there could be more gains to come as well. A recent note from Well Fargo (NYSE: WFC) reveals that its analysts have put an overweight rating and US$185.00 price target on its shares. This implies potential upside of almost 42% for investors at the time of writing.

Here's hoping this is the start of more great returns for shareholders of this high-quality company.

The post If an investor put $5,000 in Nvidia shares 5 years ago, here's what they'd have now appeared first on The Motley Fool Australia.

Last Thursday (US time), in another filing to the US regulatory body, Berkshire reported that it sold more shares of Bank of America Corp (NYSE: BAC) from 30 July to 1 August. As the disposal continues, Berkshire's holding in the bank has reduced to 12.15%.

Why is he selling the bank shares?

Warren Buffett keeps his lips tight and there could be many reasons why he's selling his banking shares.

One reason many pundits suspect is that he wants to keep his holding in Bank of America shares under 10%. As an owner of more than 10%, Berkshire has to report any transactions within two business days.

While this may be a reason, it doesn't explain Berkshire's sale of other banking shares, including Wells Fargo and JP Morgan. As highlighted above, the company is also selling Apple shares, piling up cash.

At the end of June 2024, Berkshire holds US$277 billion in cash, representing nearly 30% of its current market capitalisation of US$938 billion. This is a lot of cash.

This raises the question of whether Warren Buffett sees the outlook for the stock market and economy as gloomy. He famously said, "Be fearful when others are greedy, and be greedy when others are fearful." Is he implying that the market is too greedy now?

Implications for ASX banking shares

While he doesn't own ASX banking shares directly, this might be a good time for a reality check.

Surely, ASX banking shares had a fantastic run over the past year. Let's first look at their valuations. Based on S&P Capital IQ earnings estimates for FY25:

• Commonwealth Bank of Australia (ASX: CBA) shares are valued at a price-to-earnings (P/E) ratio of 23x and a price-to-book (P/B) ratio of 2.9x
• ANZ Group Holdings Ltd (ASX: ANZ) shares are valued at a P/E of 12.7x and P/B of 1.2x
• National Australia Bank Ltd (ASX: NAB) shares are valued at a P/E of 16.3x and P/B of 1.8x
• Westpac Banking Corp (ASX: WBC) shares are valued at a P/E of 15.1x and P/B of 1.4x

These valuation levels are generally at the high end of their historical trading ranges, which has led to debates among experts on whether it is time to take profits on leading ASX banking shares such as CBA.

While the banking sector and the broader ASX index are trading lower this morning, Macquarie sees a 'tactical buying opportunity' in ANZ shares. As the Australian highlighted, Macquarie analysts "continue to see all banks as expensive", but ANZ shares might present a buying opportunity if the underperformance continues.

The S&P/ASX 200 Banks Index (ASX: XBK) is down 3% this morning.

The post Warren Buffett is selling his banking shares. Is it time to run? appeared first on The Motley Fool Australia.

Now, all eyes are on the upcoming reporting season to take cues for the next move from here.

Meanwhile, some US banks have already started reporting earnings, starting with Wells Fargo & Co (NYSE: WFC), Citigroup Inc (NYSE: C), and JP Morgan Chase & Co (NYSE: JPM).

Of particular interest were Wells Fargo shares, which plunged nearly 6% after reporting earnings last Friday.

What caused this drop, and can we take cues from the Wells Fargo earnings for ASX bank shares?

Weaker net interest income from Wells Fargo

In the second quarter, from April to June 2024, Wells Fargo recorded US$11.92 billion in net interest income, down 9% from a year ago. Noninterest income grew 19% to US$8.77 billion, leading to a revenue growth of 1% to US$20.53 billion. Net income decreased slightly by 1% from a year ago to US$4.91 billion. Wells Fargo CEO Charlie Scharf said:

We continued to see growth in our fee-based revenue offsetting an expected decline in net interest income.

The bank explained that the lower net interest income was due to the impact of higher interest rates on funding costs and lower deposit balances. The surge in noninterest businesses was driven by higher trading revenue in its Markets division and higher fees in investment banking and wealth management services.

Looking ahead, Wells Fargo expects FY24 net interest income to fall 8% to 9%, compared to previous guidance of 7% to 9%. The bank expects higher expenses for the full year due to higher compensation expenses and a special assessment expense. Reflecting this, the bank guided for noninterest expense of US$54 billion, compared to the previous guidance of US$52.6 billion.

Wells Fargo shares had risen 32% over the past year before Friday's 6% fall. The company's results and weaker FY24 guidance were insufficient to meet the heightened market expectations. While total revenue and profits were in line with analysts' expectations, the weaker performance in net interest income and FY24 guidance disappointed investors.

Wells Fargo's rapid contraction in net interest income might be a good indication of what to look for when ASX banks report.

How did ASX bank shares perform so far?

Like US banks, ASX bank shares rose substantially in the past year. Share price performances and FY25 price-to-earnings (P/E) ratios based on S&P Capital IQ estimates are:

• Commonwealth Bank of Australia (ASX: CBA) shares rose 30% in a year and trade at FY25 P/E of 23x
• Westpac Banking Corp (ASX: WBC) shares rose 31% in a year and trade at FY25 P/E of 15x
• National Australia Bank Ltd (ASX: NAB) shares rose 37% in a year and trade at FY25 P/E of 16x
• ANZ Group Holdings Ltd (ASX: ANZ) shares rose 21% in a year and trade at FY25 P/E of 13x

ASX banks expect to report their earnings updates in August 2024, mostly between 14 and 20 August.

The post Prepare for earnings! What ASX bank share buyers can learn from Wells Fargo results? appeared first on The Motley Fool Australia.

The 'Oracle of Omaha' has been making the most of the downturn, snapping up billions of dollars' worth of stock through Berkshire Hathaway Inc (NYSE: BRK.A)(NYSE: BRK.B) over the past few months.

Interestingly, some of his major buys have fallen into one sector. At the same time, the famous investor has been offloading holdings in another.

What sectors has Buffett been buying and selling?

This year has been off to a rough start for many market enthusiasts – but not for Buffett.

The Dow Jones Industrial Average has slipped around 11% in 2022. Meanwhile, the S&P 500 has tumbled nearly 15%.

But it's the Nasdaq Composite that's suffering most. It has plunged 24% this year.

Thankfully, the S&P/ASX 200 Index (ASX: XJO) is outperforming the lot, sliding just 6% year to date.

The situation might look dire but it seems it may be Buffett's time to shine. And he's looking to the energy sector for new wins.

Buffett buys: Energy sector

A recent regulatory filing shows the multibillionaire investor has jumped on board Occidental Petroleum Corporation (NYSE: OXY) and quadrupled his stake in Chevron Corporation (NYSE: CVX) in 2022.

The oil and gas producing companies have been outperforming lately. Their share prices have gained 118% and 45% respectively year to date. They also both pay dividends.

Similar stocks on the ASX include Woodside Petroleum Ltd (ASX: WPL).

As of its previous close, the S&P/ASX 200 Energy Index (ASX: XEJ) has gained 37% in 2022 and was trading with a 6% dividend yield.

Mixed: Financials stocks

Berkshire Hathaway also recently snapped up new positions in financial stocks Citigroup Inc (NYSE: C) and Ally Financial Inc (NYSE: ALLY).

Though, the investment house has ditched its former major holding in bank Wells Fargo & Co (NYSE: WFC).

Buffett sells: Healthcare shares

It has also dumped many a healthcare stock.

Biopharmaceutical shares AbbVie Inc (NYSE: ABBV) and Bristol-Myers Sqibb Co (NYSE: BMY) were shown the chopping block while Berkshire Hathaway's holding in Royalty Pharma (NASDAQ: RPRX) was also stripped back.

However, it's worth noting Buffett has steadily held other notable healthcare stocks such as Johnson & Johnson (NYSE: JNJ) and Proctor & Gamble Co (NYSE: PG) over the last few months.

The post Warren Buffett's been bargain hunting following the stock market sell-off. Here's the sector he's been buying (and selling) appeared first on The Motley Fool Australia.

Rarely over the many years that I've covered share markets has that debate been as prevalent as it is today.

That's largely because the modern world finds itself in a wholly novel position. One with near-zero interest rates, seemingly inexhaustible levels of quantitative easing (QE), and massive pent up demand from businesses and consumers exiting pandemic lockdowns.

With growth shares broadly seen to be more dependent on easy money, value shares are increasingly in focus as rising inflation figures raise the spectre of rising interest rates.

The name of the game is patience

Growth shares can potentially deliver outsized gains in a relatively shorter time frame. That's often because investors are betting on big growth in future earnings.

Investors in value shares, on the other hand, need to be patient.

Josh Gilbert, eToro market analyst, told The Motley Fool that the strategy behind investing in value shares "is all about waiting out short-term market fluctuations in order to benefit from long-term returns. Beyond that, value investors require an eagerness to learn, and the ability comprehend a company's fundamental information and white papers".

Value shares are also a great means to tap into the power of compounding. 6% annual gains may not sound terribly exciting after the year we've just had. But via the magic of compounding, 6% annual gains will see you double your money in 12 years.

As Gilbert points out, "When you reinvest the returns and dividends earned from value stocks, your profit will grow significantly over time and your earnings will eventually begin to generate earnings of their own, with minimal extra work required."

He also told us that investing in value shares is generally less risky than most short-term investment strategies. That goes back to patience. Value investors with long-term horizons don't need to get ensnared in daily share price moves.

The downside to investing in value shares

"The biggest con is that generally value companies hide from plain site and undervalued shares worth investing can be difficult to identify," Gilbert said. "It can also take a long time for an undervalued stock to return to its intrinsically fair price. Value investors may have to hold their positions for years until the market sentiment changes in their favour."

The post-pandemic market rout was particularly painful for investors in value shares, which tend to be more closely aligned to overall economic health. With economies across the world going into reverse last year, most traditional value companies sold off heavily.

5 international value shares with a positive outlook

Gilbert left off with a list of 5 US-listed traditional value stocks.

Target Corporation (NYSE: TGT) and Walmart Inc (NYSE: WMT), he said, "are dividend-paying retail stocks that often perform well when the economy is booming".

In the financial sector, he said that JPMorgan Chase & Co. (NYSE: JPM) and Wells Fargo & Co (NYSE: WFC) are popular value stocks:

These companies' price to earnings ratios are very low compared to the market average. JPMorgan Chase & Co's PE ratio is also currently lower than the average PE ratio of the financial sector. This is often a flag for investors that the stock may still be undervalued.

Then there's Johnson & Johnson (NYSE: JNJ).

According to Gilbert:

Healthcare stocks such as Johnson & Johnson are also known as value shares. Healthcare is one of the most recession-proof sectors in the economy. Johnson & Johnson are currently developing a COVID-19 vaccine, but its primary revenue source comes from pharmaceutical sales. The company has a steady revenue stream and also pays a dividend.

Gilbert said that, overall, the outlook for value shares is positive. "Value stocks have effectively been out of favour for many years as most investors focused on tech. However, we now see that investors are picking up value shares with cheaper valuations after a difficult 2020."

The post 5 international value shares with a positive outlook: analyst appeared first on The Motley Fool Australia.

And that brings us to today. Yesterday, Berkshire filed its 10F report for the quarter ending 31 March 2021. Although that's a while ago now (and an eternity in the investing world), it's still a great opportunity to get a look inside Buffett's head and see what he's been up to.

So let's dig in.

Buffett's buys

So according to reporting in the Australian Financial Review (AFR), Berkshire did make some substantial moves over the March quarter. These were mostly selling though. His largest sells were in bank shares, particularly Wells Fargo & Co (NYSE: WFC), which the AFR notes Buffett has held for more than three decades now. At the height of Berkshire's Wells Fargo investment, the company owned more than 10% of the US$198 billion bank. But as of 31 march, Berkshire only owned ~675,000 shares, worth roughly US$32.34 million on the most recent pricing.

Berkshire also offloaded shares of another US bank in U.S. Bancorp (NYSE: USB), as well as a smaller, but total, stake in Synchrony Financial (NYSE: SYF).

Another sector that Berkshire and Buffett seem less enamoured with than in the past is oil. In the quarter ending 31 December 2020, Berkshire has a US$4.1 billion position in the oil giant Chevron Corporation (NYSE: CVX). But Berkshire has been selling off this position as well. As of 31 March, Berkshire had just US$2.5 billion worth of Chevron stock left. Perhaps the recent bull run in oil prices has served its purpose for Buffett.

Other shares that Buffett and Berkshire trimmed over the quarter include AbbVie Inc (NYSE: ABBV), Bristol-Myers Squibb Co (NYSE: BMY), Merck & Co., Inc. (NYSE: MRK) and General Motors Company (NYSE: GM).

In their place, Berkshire has added to its stake in supermarket chain Kroger Co (NYSE: KR), almost doubling its investment over the quarter to 51 million shares (worth US$1.91 billion on today's prices). It has also topped up on communications giant Verizon Communications Inc. (NYSE: VZ), and services company Marsh & McLennan Companies, Inc. (NYSE: MMC). It also initiated a position in insurance broker Aon PLC (NYSE: AON).

Berkshire's stakes in its largest holdings in Apple Inc (NASDAQ: AAPL) and Bank of America Corp (NYSE: BAC) remain unchanged for the quarter.

The post Here are the shares that Warren Buffett has been buying (and selling) lately appeared first on The Motley Fool Australia.

However, earlier in the day the Zip share price reached a record price of $11.65. This is substantially higher than the previous record of $10.79.

Why is the Zip share price rocketing

The Zip share price is rocketing higher despite no notable announcements out of the company.

Shares in the company have been sparked back into life by the announcement of the company's quarterly report. In the days following the report, the Zip share price has rocketed more than 82%.

The company reported record metrics across the board with revenue rising by 88% YoY. As a result, Zip Co reported revenue of $102 million that was driven by the company's record transaction volume. In December alone the company achieved a transaction volume of $628 million.

Moreover, the company saw its acquisition of QuadPay paying dividends as it largely drove the company's revenue increase. In the US, revenue was up an astounding 119%. It comes as Affirm Holdings Inc (NYSE: AFRM), having recently listed in the US, have seen a 40% rise in their share price over the last month.

Despite impressive transaction volume in ANZ which was up 46%, revenue growth in the area was lagging. This resulted in revenue growth only increasing by 14% for the quarter, or 43% YoY.

New Horizons

Investors have also been excited by the company's recent admission that it is pondering another listing in the US. On top of the fact that Zip management are shopping around for new investors in the country, this would bring huge amounts of capital into the company.

According to the AFR:

It is understood Zip management will spend the next few days in front of US investors, seeking to explain the company's buy now pay later payments platform and highlight its growth in the world's biggest economy, where it owns QuadPay.

American giant Wells Fargo & Co (NYSE: WFC) is helping the company with its roadshow.

Furthermore, Zip will soon have a new region to announce metrics for as Zip UK was launched in December. The company explained that the country was a strategic focus for the group and it expects the UK to helped drive growth in 2021. These results will be included from next quarter.

About the Zip share price

The Zip share price is pushing higher today again as the company continues its fantastic recent run.

The Zip share price has outpaced its ASX rival, Afterpay Ltd (ASX: APT) share price recently. Gaining 100% in the last month compared with Afterpay's 36% gain.

Zip is currently trading at a market capitalisation of $5.95 billion.

The post Another day, another Zip (ASX: Z1P) share price record appeared first on The Motley Fool Australia.

Berkshire, the company that he almost single-handedly built into a US$526 billion behemoth, is one of the largest companies in the world. It owns (or owns massive stakes in) a wide variety of businesses, including Duracell, Fruit of the Loom, Geico, Apple Inc (NASDAQ: AAPL), Amazon.com Inc (NASDAQ: AMZN), Wells Fargo & Co (NYSE: WFC) and (more recently) Snowflake Inc (NYSE: SNOW).

So needless to say, when Buffett has something to say, most investors pay attention.

Over in the United States, large companies like Berkshire have to tell the markets what shares they own, and in what quantities, every 3 months in a filing known as the 13F. Berkshire's latest filing (covering the quarter ending September 30, 2020) isn't due for a few days yet. But reporting in BusinessInsider gives us a sneak preview.

What has Warren Buffett been doing?

According to reporting from BusinessInsider, Buffett likely spent the quarter trimming positions in some of his more well-known positions.

The report quotes David Hass, a finance professor at the University of Maryland in the US. Professor Kass "closely follows" Buffett and Berkshire, and reckons he has a few insights into Buffett's more recent moves.

"I am expecting that Buffett further reduced his holdings in several banks including Wells Fargo", the report quotes Hass as stating. He also predicted that Berkshire "cashed out about US$4 billion in Apple stock last quarter". Hass makes these predictions based on Berkshire's recent earnings.

Hass also highlights Berkshire's recent ~US$750 million investment in cloud company Snowflake, which has a highly-publicised IPO back in September. He estimates Berkshire will show a US$1.5 billion position in Snowflake when we eventually get to see the filing.

However, Kass expects Buffett to put this cash to use, telling BusinessInsider that he expects the legendary investor to continue to shift his focus from "weathering the pandemic" to "deploying the company's vast cash reserves". Kass believes Buffett began this shift between the quarter ending March 31 (when Buffett net sold US$12.8 billion in stocks) and the quarter ending June 30 (when Buffett net bought $4.8 billion).

In fact, Kass says that Buffett "may be feeling even more bullish now" considering the prospect of an effective COVID-19 vaccine in "a matter of months", together with the rollout of other promising treatments for the coronavirus.

This "should remove Buffett's main cause of concern" Kass stated.

He says that "some new holdings may be revealed as well", predicting we could see some larger tech positions, despite Buffett's historical nonchalance toward the sector.

The post What has Warren Buffett been up to lately? appeared first on The Motley Fool Australia.

Don't get me wrong, I'm not buying ASX-listed bank shares.

You can read my disclaimer in the link below. I own shares in the European owner of ING Direct, ING Groep; US bank Wells Fargo and…(one moment as I check my portfolio because it has been months since I logged in)…Lloyds Bank. In addition, in the future of banking space I own Apple and PayPal. Although, I wouldn't buy PayPal shares today.

Anyhow, I'm not a buyer of ASX bank shares because I think there are better opportunities elsewhere, including overseas.

However, I think it is worth at least trying to present a somewhat balanced argument.  

Reasons to Sell Big Bank Shares in 2017

• House prices are eye-watering and the implications for a market crash or meaningful correction are significant
• Wages growth is lacklustre and likely to stay that way, affecting loan serviceability and demand for credit
• Interest-only loans are a now a significant part of the big bank loan portfolios
• Household debt levels are at a record high
• The interest rate cycle may have bottomed
• Bad debts are at record lows
• Competition is increasing, forcing the banks to move rates higher out of cycle
• Regulation is increasing
• Everyone hates the banks
• Their dividends are cyclical
• Their earnings streams are correlated (that's finance for 'not as diversified as they could be')
• Shares are modestly overvalued
• If you are like most Aussies, you could be overexposed to the domestic property and banking system
• Finally, Australia has gone 26 years without a recession — that's a world record

Ok, breathe… here are some of the reasons not to sell your Big Bank shares…

Reasons to Hold Your Bank Shares in 2017

• If you're a long-time shareholder you will be forced to split your profit with the ATO
• The big banks are profit machines defying the odds with their cartel-like control of the market
• They pay big fully franked dividends
• The potential to lower costs with technology provides some dry powder
• Shares are not that expensive
• No-one knows when property or the economy will crash
• The banks have an implicit guarantee from the Government

Foolish Takeaway

The Big Banks have been great investments over the past two decades in a recession-less Australia. In that time they were deregulated, went out and acquired every competitor they could, then ramped up their lending. Now, the seasons are turning.

I'm not buying Aussie bank shares today or this year. But, as always, it is your decision whether or not to sell your shares based on the facts.

The post 7 reasons it may NOT be time to sell your Big Four bank shares appeared first on The Motley Fool Australia.

Why would Buffett buy it?

Currently, Buffett's Berkshire Hathaway holds shares of US-based banking giant, Wells Fargo, as well as US Bancorp, Goldman Sachs, Bank of New York Mellon Corp and more. Basically, he likes owning banks.

The Buffett checklist

According to an interview of Charlie Munger, Buffett's partner in crime at Berkshire Hathaway, the duo look to tick four boxes on prospective investments. Let's run Commbank through the four-part checklist.

1. They must be capable of understanding the business.

If you don't understand the business in which you partly own (as a shareholder), you shouldn't own it.

As the owner of 16.5% of all shares in Wells Fargo — worth the equivalent of 38% of Commbank — and numerous other banks, I think Buffett could wrap his head around Commbank's business and understand it very well.

It ticks this box.

2. The business must have a durable competitive advantage.

As Australia's largest and most dominant bank, having made significant investments in technology, Commbank has an advantage over its peers like Westpac Banking Corp (ASX: WBC) and Australia and New Zealand Banking Group (ASX: ANZ). I'm not sure it is a durable advantage, but it has worked so far.

It ticks this box, too.

3. Management must have integrity and talent.

Ian Narev is CEO of Commbank, having been in the role since late 2011. Although it is a crude measure, the bank's share price is up 71%, paying out larger dividends while maintaining its commanding stakes in deposits and mortgages.

Narev is backed up by many other highly experienced bankers.

It gets a tick for this one.

4. The valuation must make sense.

This is where Commbank falls down, in my opinion. Buffett is known for buying wonderful businesses at good prices. Generally, this happens only when the world's financial markets are a mess and panic runs rife.

At today's prices, I do not think Buffett would be in a rush to buy Commbank shares. As I showed here, they are not at bargain prices. For that reason, although Commbank is likely a Buffett-type company, I doubt he would buy shares in it today.

The post Is Commonwealth Bank of Australia (CBA) a Warren Buffett stock? appeared first on The Motley Fool Australia.

Buy or sell, which is it?

You clicked on this article because you either:

• Own CBA shares, or
• You are considering owning them

Basically, you are not motivated to hear someone (me) say, "hold the shares". You want me to have an opinion.

"Buy"

"Sell!"

But, 99% of investing is doing nothing. Unfortunately, it's the other 1% that will change your life.

And most of the time, CBA — a large blue chip company — won't be a standout buy or sell. Most of the time you'll be buying or selling CBA shares at 'fair value'. That is, when they are clearly not over- or under-valued.

So why rush?

Why not wait for shares to be a 'bargain' before buying?

Provided your portfolio is well diversified — with less than 20% invested in Aussie bank shares — I see no clear reason to panic sell or buy CBA shares today.

3 reasons to hold CBA shares

• Dividends. At today's prices, CBA shares pay yearly dividends equivalent to 5% fully franked. If you're an Aussie resident holding the shares for more than 45 days you'll get the franking credits in your tax return — meaning your 'gross' dividend is over 7.1%. That's a handy income stream.
  Plus, I presume you bought shares in CBA from a lower price — so your dividend is even larger.

• Valuation. We can use dividends to value CBA. Assuming the bank pays $4.21 per share in yearly dividends growing at 2% per year, I value CBA shares at $85.88. Meaning, based purely on dividends, CBA shares are 'worth' a touch under $86. At their current price of $85, they are not a bargain or meaningfully overvalued. Of course, this may be a quick and potentially painful valuation.
• Growth in profits. I'm pretty negative on the Aussie banking sector. For the record, I own foreign banks like Wells Fargo, Lloyds Bank and ING Groep, from lower prices, but no Aussie bank shares. Indeed, I'm broadly concerned about Aussie banks.
  Nonetheless, I believe CBA has the potential to increase its profits if it continues to cut costs and interest rates rise very slowly. If interest rates rise (slowly!) CBA may be able to widen its profit margins, which could lead to more dividends.

The post 3 reasons to hold Commonwealth Bank of Australia shares appeared first on The Motley Fool Australia.

Is the Australian Dollar (A$) headed above 80 US cents?

I have been pretty negative on the Aussie dollar over the past few years. Meaning: I think it will fall.

I don't — and won't — try to make money from a rising or falling AUD. I'm not a currency trader.

But I know that over time currencies tend to gravitate towards the country with the stronger economy. The country with higher interest rates and lower unemployment.

By recognising this, savvy long-term investors can take advantage of momentary currency weakness to transfer their investment monies into the foreign currency.

That's why 90% of my investment portfolio is in US dollars, held in my optionsXpress brokerage account.

(Note: I do NOT receive anything for saying that I use optionsXpress)

For example, I used strength in the Aussie dollar last year to buy shares of technology company PayPal; US banking heavyweight Wells Fargo and Twitter Inc.

Then, I bought more US dollars earlier this year. I used the cash to buy shares of Amazon.com and Berkshire Hathaway, Warren Buffett's company.

Anyway, back to the currency…

I have been more than happy to take my Australian dollars, transfer them to US dollars in my brokerage account and buy shares of these great companies.

Why?

Firstly, if you don't have more than 30% of your wealth overseas I think you are doing something wrong. The Australian sharemarket was just 1.5% of the world's total the last time I checked.

So, believe me, or not, the evidence states that it is less risky to invest overseas.

Secondly, take a look at the Aussie economy and ask yourself whether or not our 26+ years of nonstop economic growth can continue. Remember, currencies generally — over time — gravitate towards the stronger economy.

Just ask Zimbabwe.

Finally, even if I get it wrong and the Australian dollar goes higher (which would be 'bad' for me — because my money is in US dollars), what am I left with?

Shares in some of the biggest and best companies on earth?

It could be worse.

The post Is the Australian Dollar (A$) headed above 80 US cents? appeared first on The Motley Fool Australia.

The Net Interest Margin (NIM)

The net interest margin, sometimes shortened to 'NIM', is the difference between the interest rate a bank can lend its money versus what it must pay to get that money. For example, a mortgage might cost a homeowner 5% per year but the term deposits used to fund that mortgage pay away 4% per year. In this example, the net interest margin is 1%.

However, a net interest margin does not tell us anything overly meaningful by itself, so it's good to compare the current net interest margin to historical levels and that of its peers. Here are the net interest margins of the major Australian banks. I've used the latest official results I could find.

Net Interest Margins

As can be seen, the Net Interest Margin of CBA is slightly ahead of its local rivals, including Australia and New Zealand Banking Group (ASX: ANZ), Westpac Banking Corp (ASX: WBC) and National Australia Bank Ltd. (ASX: NAB). However, it also falls grossly short of those of its international rivals, like the USA's Wells Fargo and the UK's Barclays.

The net interest margins of Australia's banks have also fallen over recent years.

That means CBA's lending business has become less profitable. Closer inspection of the margin might suggest increases in the cost of funding, like term deposits and wholesale debt margins. Competition between banks is also a major issue. In Australia, many of the second or third-tier banks offer far better interest rates than the four major banks.

Market Share

Another way to analyse the banks is to look at market share. Thankfully, APRA, the bank regulator, demands to see the loan books of all Australian banks. It publishes the data each month. You can find it here.

Assessing market share enables an investor to understand where the bank makes its money. However, it can also do something more powerful. It can reveal which banks are experiencing growth.

Banking is competitive, so if one bank is growing quickly it must be doing something differently. Often, it means they are doing something shareholders will regret! For example, if your bank recently ramped up its lending to property investors — especially to apartment developers — it could have significant long-term implications.

Remember, bank loans are long-term commitments.

Once again, it's important to know how the data is calculated and how it has changed over time. The above graphs reveal CBA's share in just two markets — there are many other markets (think: credit cards, business lending, etc.). Nonetheless, it's clear CBA is a major player in its key markets of property lending. In recent years, it has experienced market share gains in these two areas.

The Price-Book ratio

Many people use the price-earnings ratio (P/E) to value bank shares.

Tsk. Tsk. Tsk.

Rookies.

The price-earnings ratio is simply net profit/share price.

However, banks nearly always trade at a lower P/E ratio compared to the broader market, so they nearly always look 'cheap'. However, among other things, banks are intensely cyclical. Their profits can appear enormous one minute only to be sliced and diced a year later, as bad debt charges leech profits.

If you are going to use any ratio to 'value' (if you can call it that) a bank share, use the price-to-book ratio (P/B ratio). It's calculated as share price/book value.

Above, I alluded to the concept that most banks make money from lending money at a slim margin.

Importantly, the 'book value' of a bank is much more stable than its 'profit', so it should provide a more reliable and stable reference point for your valuation. The book value is the value of assets (e.g. loans and credit cards) minus liabilities (e.g. term deposits and wholesale debt).

So what does CBA's P/B ratio tell us? It tells that investors 'value' its assets much more than any of its peers.

Bringing it all together

So, what do a falling net interest margin, growing market share and very large P/B ratio tell us? To me, that says CBA is less profitable but growing fast yet people (read: investors) are still willing to pay a premium valuation for its shares.

Hmm…mmm… a huh.

Of course, this is NOT a comprehensive picture of CBA.

Note: if you want me to do an in-depth piece on CBA, shoot me an email.

I should also make note of some of the other ratios and metrics I look for in a bank, such as:

• Cost to income
• Bad debts as a percentage of assets
• Provisions for bad debts
• Net interest income growth versus non-interest income growth
• Payout ratios
• Capital adequacy
• The types of loans being issued

Then, there are all the fun qualitative features I look for in a bank:

• Management
• Strategy
• Competitive pressures
• Cyclical effects

The list goes on.

Buy, Hold or Sell

Like I said, this is hardly a thorough analysis of CBA — it's a $140 billion bank! But I hope this provides an easy way to go about understanding the internal drivers of valuation and risks.

Oh, and, in summary, I'm in no rush to buy CBA shares. I own Wells Fargo shares (see my disclosure, below). 

The post 3 ways I analyse Commonwealth Bank of Australia shares appeared first on The Motley Fool Australia.

The Buffett Munger Formula

In an interview with the BBC back in 2009 — when financial markets were crashing in the wake of the global financial crisis (GFC) — Buffett's investing partner Charlie Munger revealed a surprisingly simple set of rules they use to pick investments for their $US 430 billion company, Berkshire Hathaway.

Let's run the four-part checklist over NAB shares to get a sense if they would buy in today:

1. Buy businesses you are capable of understanding. Buffett and Munger believe there is no point buying shares in a business you don't understand. Don't know what product it sells? Don't buy it. Can't explain the strategy? Don't buy it.

Given Buffett's history of investing in bank shares, I think he could understand NAB's operations quite easily.

2. A durable competitive advantage is a must-have. A 'competitive advantage' is something that makes a business able to withstand competition and grow stronger. It may be the company's brand, product or a barrier that protects its products from becoming just like every other in the market. For example, Buffett owns Coca-Cola Company shares, has a large stake in Kraft Heinz and almost $US 7 billion in Apple Inc. He also owns shares of banks, like Wells Fargo.

I think NAB has a competitive advantage, with a leading position in business banking and a decent chunk of the mortgage market. I don't know if its advantage is 'durable' but I think it has an advantage that will help it continue to turn out profits.

3. Company management must have integrity and talent. It's pretty easy to understand why you would want a CEO and board to show these two traits. You don't want your business run by tyrants.

The CEO of NAB is Andrew Thorburn, an experienced banker and the current Chairman of the Australian Bankers' Association. I think he passes the test. The board is led by Kenneth Henry AC.

4. No company is worth an infinite price. Obviously, no matter how good a company looks, you still need to pay a decent price for shares – to maximise your return. Buffett and Munger have a knack for waiting for what seems to be — after the fact — a really good time and price to buy. For example, during the GFC, Buffett bought options in US investment bank Goldman Sachs.

At the time, Lehman Brothers — the fourth biggest investment bank in the world — had just gone bust. So when he made the $US 5 billion Goldman deal, some people thought he was a little bit crazy. But just four years later Buffett had made $US 3.1 billion (a 60% return), from dividends and shares.

As Buffett said in his most recent letter to shareholders: "Every decade or so, dark clouds will fill the economic skies, and they will briefly rain gold. When downpours of that sort occur, it's imperative that we rush outdoors carrying washtubs, not teaspoons. And that we will do."

Given the 20% rally in NAB shares over the past year, I doubt Buffett is outside waiting for NAB shares to rain into his bucket. My guess is he'd want a lower price before buying in.

The post Would Warren Buffett buy National Australia Bank Ltd. shares? appeared first on The Motley Fool Australia.

In June 2015, shortly after taking his first position in Insurance Australia Group Ltd (ASX: IAG), Buffett said:

"In looking at banks, I would say there is a good chance that five years from now, we will have bought one or more positions in Australian banks."

At the top of Australian banking is the Commonwealth Bank, all $143 billion of it.

The Buffett-Munger Checklist

In an interview with the BBC during the Global Financial Crisis (2009), Buffett's investing partner, Charlie Munger, revealed the duo's secret investing sauce. It's a surprisingly simple four-part checklist.

1. Buy businesses you are capable of understanding. Put another way, if you don't understand it — don't buy it. The Sydney Morning Herald quoted Buffett a few years ago as saying: "Banking is something I have looked at, I am comfortable with banks, we have some big positions in US banks."
With around $28 billion of Berkshire Hathaway capital invested in Wells Fargo & Co, I think Buffett would be comfortable holding Commonwealth Bank shares — at the right price.

2. A durable competitive advantage is a must-have. A competitive advantage is something that makes a business capable of withstanding intense competition. Maybe it's the brand, its products, dominance or regulatory position. It's only durable if it can last.

Commonwealth Bank of Australia has the largest market share of mortgages, is ahead of its peers in terms of technology and is an efficient lender of capital.

3. Company management must have integrity and talent. This one is pretty straightforward. If you could pick two words to describe a great CEO those are probably what you would go with. Commbank CEO Ian Narev has done a good job since he joined the bank in 2007 as Head of Strategy.

4. No company is worth an infinite price. This makes sense. In some ways, it relates to the law of averages: If you do the same thing as everyone else — you will get an average result. Buffett waits for the valuation of shares to fall so hard that he cannot ignore it. Usually, these opportunities come at times when people are panicking like they were during the GFC when he bought share options in Goldman Sachs at a ridiculously cheap price. Buffett hoards cash and waits for these opportunities to present.
Based on valuation alone I do not think he would buy Commonwealth Bank of Australia shares today.

The post Would Warren Buffett buy Commonwealth Bank of Australia shares? appeared first on The Motley Fool Australia.

Is it time to buy Commonwealth Bank shares?

Year in Review

Following the announcement in late August of a 2% fall in profit for its 2016 financial year, Commonwealth Bank shares edged higher to their current price of approximately $78.80.

Although a few concerns surrounding profit margins and loan impairments began to arise, overall the result appeared a consistent one. In addition, the bank announced a dividend of $4.20 per share, in-line with last year's payout.

Commonwealth Bank's third quarter update was also more of the same, once again hinting that we have passed a low in the credit impairment cycle.

Rumbles emerging?

Under the hood of all large banks however lies a tangled web of assumptions, compromise and leverage, a lethal concoction if – or when – the banking cycle turns.

Ultimately, banks are not only cyclical but hypersensitive to cycles. Given the bank has around $13 of loans for every $1 of shareholder equity, you can quickly understand why it does not take much of a downturn in its loan book to hurt profits.

Fortunately, Commonwealth Bank has a reputation for relatively prudent lending standards, which provides the best insurance for any bank during a downturn. Compared to its global counterparts, such as Wells Fargo for example, Commonwealth Bank has a low level of funding from customer deposits, currently around 66%. However, its push into deposits is reassuring as we lead into 2017.

Specifically, some forecasters expect interest rates to rise either in 2017 or 2018. In the U.S., where Australian banks derive a lot of their 'wholesale' funding, debt is expected to get more expensive. Moreover, the US Dollar (USD) is forecast to remain strong. Therefore, banks which use more deposit funding (opposed to wholesale funding from overseas) could be insulated from rising costs and a squeeze on their lending margins.

Using customer deposits does one very important thing for a bank's profit margins, it extends them. Versus the interest rates on loans, deposit rates usually take a little longer to push up — widening the margin. But not only that, given that banks lend much more money than they have in equity, usually for a very long time, the incremental gains can be significant. Ultimately, banks lend long and borrow short, in terms of the durations of their assets and liabilities, respectively.

To emphasise what a margin expansion can do, a 0.1% move in Commonwealth Bank's net interest margin (NIM) could result in $800 million in additional interest income.

A double-edged sword on a tightrope

More goes into a sound investment case than a hypothetical tinkering of lending margins. Undoubtedly, the elephant in the room for bank shareholders is property prices. To use a poor analogy, the heat is certainly on in the kitchens of Melbourne and Sydney. Unfortunately, the banks can't get out.

Like its peers, Commonwealth Bank's margins are at the mercy of the property market. Prudent lending standards do not help a bank avoid a market crash. According to some however, the Government does.

The implicit guarantee that the Government provides to Australia's banks, including Commonwealth Bank, is often used as an excuse by investors to remain heavily exposed to bank shares. If the government was ever forced to come to the rescue, however, I would be willing to bet that shareholders would be all but wiped out.

Foolish takeaway

Many analysts will tell you a rising interest rate environment is good for Commonwealth Bank shares and those of its peers. However, there is too much junk in its trunk to say in any absolute terms the bank will benefit because there are too many moving parts, such as a cooling property market and increasing regulation.

Ask your finance Professor and he will tell you that uncertainty is the definition of risk. Therefore, with so many moving parts and such uncertainty in the market, I would want to pay a lower price than $78.80 for a slice of Commonwealth Bank shares. Although its forecast 2017 dividend is appealing, I would hold off buying Commbank shares, for now.

The post 2017 stock idea: Commonwealth Bank of Australia appeared first on The Motley Fool Australia.