The Peter Lynch Investor » Newsletter » Why is Michael Burry buying bank stocks
Michael Burry

Why is Michael Burry buying bank stocks

In the first quarter of 2023 Michael Burry bought New York Community Bancorp Inc (NYCB), Capital One Financial Corp (COF), Wells Fargo & Co (WFC), Western Alliance Bancorp (WAL), PacWest Bancorp (PACW), First Republic Bank (FRCB), and Huntington Bancshares Inc (HBAN).

Is value driving Michael Burry to buy bank stocks?

I’m curious to know because if you subscribe to our model Peter Lynch Portfolio you’ll notice there’s a lot of bank stocks making the list. There’s Arrow Financial Corp (AROW), Citizens Holding Co (CIZN), First Bancorp (FNLC), Lake Shore Bancorp Inc (LSBK), National Bankshares Inc (NKSH), Bank of N.T Butterfield & Son Ltd (NTB), Zions Bancorp NA (ZION).

Recently banks like, Silicon Valley Bank (SIVB), First Republic Bank (FRCB), Credit Suisse (CS) have gone bankrupt. As a result many of their peers have seen a decrease in their share prices. However, one has to wonder is the decrease justified? And, if not, then are there some bargains to be had for those willing to stomach the risk.

New York Community Bancorp Inc (NYCB) has a impressive return on equity (ROE) of 33%, a dividend yield of 6.44% and a P/E Ratio of 2.3.

Capital One Financial Corp (COF) has an ROE of 11%, a dividend yield of 2.29% and a P/E Ratio of 7.0.

Wells Fargo & Co (WFC) has an ROE of 9.12%, a dividend yield of 2.93% and a P/E Ratio of 11.33.

Western Alliance Bancorp (WAL) has an ROE of 18.98%, a dividend yield of 4.10% and a P/E Ratio of 3.87.

PacWest Bancorp (PACW) has an ROE of -27.47%, a dividend yield of 0.59% and no P/E Ratio.

Huntington Bancshares Inc (HBAN) has an ROE of 15.09%, a dividend yield of 5.83% and a P/E Ratio of 6.67.

With the exception of New York Community Bancorp the share prices of Burry’s portfolio of banks are still lower than when fear gripped their industry.

Burry's banks performance chart

So is now the time to follow Burry’s example and buy bank stocks?

Personally, I’m a believer in taking positions in companies when their industry is shrouded in fear. It’s usually the best time to buy because of the discount. As Warren Buffett says, “be fearful when others are greedy, and greedy when others are fearful.”

Apparently Burry agrees.

However, it doesn’t always work out. Burry’s bet on First Republic Bank (FRCB) might have handed him a loss.

Perhaps Burry is playing a game of odds. He may be prepared to lose on some banks but knows that not all the banks will go bankrupt. In that case diversifying amongst the banks will ensure some protection.

Clearly, I can’t read Burry’s mind but hypothesizing about his strategy offers insight into how we might approach investing in these out-of-favour bank stocks.

I’ll wait a little longer before buying banks. Another well known saying in investing is, “don’t try to catch a falling knife.” It means there’s a strong chance that if you rush to buy a stock as its price drops that it will continue to drop.

I’ve learned that lesson the hard way.

Be sure to check out the model Peter Lynch Portfolio. Subscribe and I’ll keep you updated on its progress. It’s free!