2 Bank Stocks You Can Buy for $1,000 and Hold Forever - Latest Global News

2 Bank Stocks You Can Buy for $1,000 and Hold Forever

Warren Buffett is a big fan of bank stocks. Its holding company, Berkshire Hathawayhas several large investments directly linked to the financial sector.

Two of Buffett’s positions are particularly attractive right now. One bank is a company with high value potential, while the other offers compelling long-term growth potential.

These bank stocks are trading at a deep discount

Bank stock valuations can fluctuate widely during various economic booms and busts. Citigroup (NYSE:C)For example, the price-to-tangible book value ratio – a metric that measures how much the market is willing to pay for a company’s net real assets – has fluctuated between 0.5 and 6.5 over the decades.

After the 2008 financial crisis, bank valuations fell dramatically across the board. While stocks like Wells Fargo And Bank of America While its valuations fluctuate between 1 and 2 times tangible book value, Citigroup stock remains in the penalty box. Based on price-to-book ratios, Citigroup shares trade at a 50% discount to Wells Fargo and Bank of America.

Someone at Berkshire, perhaps even Buffett himself, noticed this valuation gap in the first quarter of 2022 and opened a $2.8 billion position – one of Berkshire’s largest bank stock positions. For this investment to pay off, Citigroup must demonstrate that it can generate an average return on its asset base. If he fails to do this, the market will continue to discount his valuation. Last quarter, for example, Citigroup posted a return on equity of just 3.8%. Bank of America, on the other hand, achieved a return on equity of 8.7%, while Wells Fargo achieved 10.2%. It should come as no surprise that the market is willing to pay more for shares of Wells Fargo and Bank of America.

Citigroup has certainly set the bar low for performance. And its current chief executive, Jane Fraser, has struggled to reflect the bank’s multi-year restructuring efforts in its financial performance. But that may be why Buffett and Berkshire hold a billion-dollar stake in Citigroup. The bank has long lagged behind industry metrics, but the current valuation of the stock more than reflects this. Investors simply don’t have to pay as much to benefit from Citigroup’s turnaround efforts. And if returns depend on what you pay, Citigroup should be a top contender for any value investor’s portfolio.

C Price-to-tangible book value chart

C Price-to-tangible book value chart

Buffett is betting $900 million on this growth machine

Even though it’s one of Berkshire’s smaller positions, Buffett is still bullish Now stocks (NYSE:NOW) to retain a $900 million investment. It’s not hard to see why Buffett and his team are willing to invest nearly $1 billion in the company. For a bank stock, Nu has tremendous long-term growth potential.

Nu’s entire business model is to disrupt the heavily consolidated Latin American banking sector. For decades, the region was dominated by a handful of competitors who charged high fees for basic services. This industry consolidation reduced the incentive to innovate. The incumbents simply weren’t interested in shaking up a situation that was quite profitable for them.

Nu’s vision was to offer low-cost, easy-to-understand financial products directly from a smartphone. Because there were no physical branches to maintain, the structural cost base was lower than that of incumbents. It could also innovate and introduce new products to customers much faster than competitors. In the first decade of its existence, the number of customers grew from zero to almost 100 million.

Nu has demonstrated tremendous ability to convert entire countries to its platform. About half of all Brazilian adults, for example, are now Nu customers. The bank has recently entered the Mexican and Colombian markets, but considering Latin America has a population of more than 600 million, there is still plenty of potential for growth. Future markets will not be as attractive as Brazil or even Mexico or Colombia. Elsewhere, average incomes are lower and competition varies by region. But Nu is playing the long game, establishing a reputation for trust and innovation in a market that has long lacked both.

With a valuation of around $55 billion, Nu doesn’t have the big advantages of a full start-up. But it also has an enviable track record that few early-stage growth companies can boast. Investors will have to remain patient for this long-term story to unfold, but Nu is a high-quality company with a strong future. And it happens to be backed by one of the most successful investors in history: Warren Buffett.

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Citigroup is an advertising partner of The Ascent, a Motley Fool company. Bank of America is an advertising partner of The Ascent, a Motley Fool company. Wells Fargo is an advertising partner of The Ascent, a Motley Fool company. Ryan Vanzo has no position in any of the stocks mentioned. The Motley Fool holds positions in and recommends Bank of America and Berkshire Hathaway. The Motley Fool recommends Nu Holdings. The Motley Fool has a disclosure policy.

“2 Bank Stocks You Can Buy for $1,000 and Hold Forever” was originally published by The Motley Fool

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