Here's Why Warren Buffett Is Buying Bank Stocks

Warren Buffett stands among the world's richest men.

He's amassed an $80 billion net worth over the decades by buying stocks he deems inexpensive and riding out economic storms and market downturns.

So, I find it extremely interesting that at a time when the markets are sideways and interest rates are falling, Warren Buffett is buying banks...

Berkshire Hathaway is now among the five largest shareholders at firms like Bank of America Corp. (NYSE: BAC), JPMorgan Chase & Co. (NYSE: JPM), and Goldman Sachs Group Inc. (NYSE: GS). Even credit card giant American Express Co. (NYSE: AXP) is a significant Buffett holding.

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Right now, a lot of people are avoiding banks because of falling rates. But when you understand the broader trends, banking stocks are attractive, cheap, and have massive upside.

There are other major trends in the banking industry that you should know about.

I'll discuss those major trends and tap into the best bank stock to buy according to the Money Morning Stock VQScore™.

Why Banks Are a Buy Today

There are plenty of reasons to own bank stocks...

First, the financial sector's price/earnings ratio is the lowest it's been in five years. It's also the least expensive of any major S&P 500 sector.

Banks are also much healthier than they were during the financial crisis, and they have been boosting buybacks and dividends to return cash to shareholders.

But the top reason why you should buy bank stocks now is consolidation.

Of course, I'm not talking about the 2009 "too big to fail"-style consolidation we saw a decade ago. I'm talking about the consolidation that sees regional banks and holding companies snapping up smaller community banks across the United States...

You see, lower interest rates, higher technology costs, aging boards of directors, and squeezed margins are fueling consolidation. Another factor is the competition for deposits, which are required to boost lending capabilities.

When it comes to banks, there are only two ways to grow deposits. You can experience a large population influx as some banks have experienced in growing U.S. cities like Naples, Fla., and Austin, Texas.

Or you have to go out and buy banks one at a time.

The latter has been the trend for most of the financial sector. And with margins squeezing, banks have a lot of reason to consider selling out.

For smaller banks, the cost of keeping up with the ever-growing list of regulatory reports is making it difficult to turn a profit.

On top of that, to compete, you have to offer mobile and digital banking products. But to build and maintain this technology is not cheap. It's extremely expensive keeping all that data and money safe from cyber thieves.

The costs of technology and regulatory compliance are a huge drag on profits. It often makes sense to sell out to a larger bank that can spread the costs over a much bigger asset base.

And I have the top stock to buy to tap into this M&A trend...

The Best Bank Stock to Buy Now

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The best way to tap into the trend of bank consolidation is to purchase shares of Home Bancshares Inc. (NASDAQ: HOMB).

Founded in 1999 by John W. Allison and Robert H. "Bunny" Adcock, the bank has grown from just $25 million in assets to over $10 billion today.

During that time, it has acquired more than 20 banks and spread its operation across the Southeastern part of the United States.

Allison is a top-notch executive with a history of fueling this spectacular growth.

His outstanding results can be contributed to the fact that he doesn't think like a banker...

He can be quoted saying, "I'm not a banker, I'm a businessman. I run it like a business. I don't run it like a bank."

That sort of mentality leaves him highly motivated. Allison, after all, is the firm's largest shareholder with around $100 million worth of stock.

He once told Money Morning Special Situation Strategist Tim Melvin that he looks to buy banks with low returns on equity. He also wants assets that he believes he can improve through an operations overhaul.

Allison says that if he can purchase an underperforming bank with a return on assets under the 0.99% industry average and improve its numbers, his shareholders will make a lot of money.

Allison has said he wants to get earnings growth to the point that HOMB stock reaches $50 a share.

That figure is quite attractive from the $17.80 per share that the stock trades for today.

Given the trajectory of the banking industry, it wouldn't surprise us to see Allison achieve his goal of returning 180% to shareholders from today's price.

I wouldn't be surprised because HOMB has a VQScore of 4.8.

That figure puts HOMB squarely in the "Strong Buy" zone, with a high probability the stock will take off much like Allison has projected.

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When Neil Patel launched the Angels & Entrepreneurs Summit, he had only planned to invite a small group of guests to join him and guest "Shark" Robert Herjavec... but then Neil revealed something truly shocking.

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About the Author

Garrett Baldwin is a globally recognized research economist, financial writer, consultant, and political risk analyst with decades of trading experience and degrees in economics, cybersecurity, and business from Johns Hopkins, Purdue, Indiana University, and Northwestern.

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