Wells Fargo & Co (NYSE:WFC) has been hit hard by the fallout from the company’s fraudulent accounting scandal. Warren Buffett first took a stake in WFC stock way back in the 1990s. Today, his firm Berkshire Hathaway Inc. (NYSE:BRK.A, NYSE:BRK.B) owns a staggering 479.7 million shares of Wells Fargo, worth around $22 billion.
In recent weeks, WFC stock has tanked to its lowest level in 2.5 years. The stock has certainly lost much more in market cap than its $185 million fraud settlement.
Following Senator Elizabeth Warren’s intense grilling of CEO John Stumf in front of the Senate, a growing number of critics are now calling for Stumf’s resignation.
The scandal has scared investors, and it has undoubtedly has made Buffett uncomfortable as well. Now that the grisly details of the scandal have come out, the $22 billion question remains; just how uncomfortable is Buffett?
Traders have a lot riding on figuring out Warren Buffett’s next move. Here are three possibilities.
Next Warren Buffett Move: Sell Wells Fargo (WFC)
Most fund managers with such a large stake in a company would come out and publicly defend its actions or try to dismiss their impact. However, Buffett is taking a different approach.
“If I start commenting on that or anything else, it will lead down too many paths, so I will wait until November to speak out about it, the election or any other subject,” Buffett told Fox Business this week.
The surprising comment already has analysts and traders speculating that Buffett intends to cut ties with WFC.
Rafferty Capital analyst Dick Bove recognizes the warning sign. Bove points out that, while Wells Fargo CEO John Stumpf was being interrogated by the Senate Banking Committee, BRK.B investment manager Todd Combs joined the board of rival banking giant JPMorgan Chase & Co. (NYSE:JPM).
“He is clearly walking away from Wells Fargo,” Bove wrote of Buffett following the news.
Next Warren Buffett Move: Buy J.P. Morgan Chase & Co. (JPM)
If Bove is correct, Buffett could be laying the groundwork for BRK.B to rotate from WFC stock to JPM stock.
For traders, that could mean a major pair trade opportunity. For Wells Fargo, nearly 10% of the company’s outstanding shares would be flooding the market from BRK.B alone. But the biggest concern would be all of the funds and retail investors who mimic Buffett’s investments following suit.
On the other hand, if Buffett were to take an equal-sized position in JPM stock, he and his followers would provide some massive support for JP Morgan in quarters to come.
Buffett’s buying pressure coupled with his endorsement and the stock’s low valuation would likely lead to some significant outperformance for JPM in coming quarters.
Next Warren Buffett Move: Do Nothing
It’s fun to speculate on what Buffett’s comments to Fox may mean. If I were a WFC shareholder, I’d certainly be worried. However, Buffett liked Wells Fargo long before these fraud issues sprung up, and he’s certainly never made a habit of selling stocks on a dip.
Buffett has been an outspoken supporter of Democratic presidential candidate Hillary Clinton. Unfortunately for Clinton, Buffett may not be the type of supporter Clinton wants to present to voters. Despite the fact that Buffett seems to be a genuine and caring person, Clinton is actively campaigning against Wall Street. Yet critics point out that three of Clinton’s five largest individual campaign donors since 1999 have been Goldman Sachs Group Inc (NYSE:GS), Citigroup Inc (NYSE:C) and JPM.
Clinton is already fighting to overcome ties to big bank donors and a series of her own personal scandals. It may be boring, but the most likely explanations for Buffett’s silence is that Clinton told him to zip it until after the election. The less Buffett talks, the less of a connection voters will make in their minds between Clinton, Buffett, Wall Street and scandal.
Sometimes, people say exactly what they mean, and Buffett has a history of speaking plainly. Yes, his comment could imply that he is bailing on WFC stock. But Buffett could also mean simply what he said: he’ll talk about it after the election.
As of this writing, Wayne Duggan was long C stock.