Warren Buffett: 2 Stocks to Avoid This Year

Is Warren Buffett right in selling bank stocks? Bank stocks have taken a hit, as they face a risk of default once the government’s deferral program ends. Should you take this risk or avoid it?

| More on:

The year 2020 is a classic example of the unpredictable nature of the stock market. The factors that influenced the stock price movement have changed. Hence, the TSX Composite Index surged 16%, even when the gross domestic product (GDP) contracted 38.7% in the second quarter. The factors driving the stock market rally was the government stimulus package that increased household disposable income by 10.8% in the second quarter. Canadians invested this money in tech stocks and gold stocks.

What is Warren Buffett up to?

However, traditional businesses continued to perform in tandem with economic growth. This year, the market saw some unusual moves by the Oracle of Omaha, Warren Buffett. Instead of buying at the dip, he is selling at the dip. He exited his entire position of $6 billion in airline stocks and has, so far, sold another $6.9 billion worth of stocks in nine U.S. banks and financial stocks. However, he is buying more stocks of Bank of America.

You may question Buffett’s investments in tech and gold stocks, but you don’t question him on bank stocks. He is the one who made money from the 2009 financial crisis by investing in bank and financial stocks. Then why is he selling them now?

The central bank reduced the interest rate to nearly zero and offered loan deferrals as part of the stimulus package. These deferrals will end in October and November, thereby exposing banks to a large number of defaults. Moreover, many capital-intensive companies like airlines and energy have withdrawn their revolving credit facilities and taken short-term loans to maintain liquidity to withstand the crisis.

The rating agencies have already downgraded airline debt to high risk “BB-” ratings. If these companies file for bankruptcy, it could lead to more bad debts for banks. He probably expects bank stocks to hit rock bottom once the default figures are out. Then he might invest in distressed banks.

The fact that Buffett stays invested in Bank of America is because it has a lower risk of default than other banks.

How to play the Buffett card with TSX stocks 

The Toronto Stock Exchange is dominated by the Big Five banks. All the banks have sufficient liquidity to withstand the crisis. They have also set aside provisions for credit losses. The credit defaults would significantly impact the profitability of these banks this year and probably the first half of next year. That is when some of these stocks might hit the bottom.

Among the top five banks, Toronto-Dominion Bank (TSX:TD)(NYSE:TD) and Bank of Nova Scotia (TSX:BNS)(NYSE:BNS) reported some of the steepest dips in net income and return on equity (ROE) in the third quarter of fiscal 2020.

  • TD Bank’s net income fell 30% year over year (YoY), while its adjusted ROE fell 580 basis points to 10.4%.
  • Bank of Nova Scotia’s net income fell 47% YoY, while its adjusted ROE fell 600 basis points to 8.3%.

Hence, their stock prices did not recover significantly from the March sell-off and are still down 16% and 26%, respectively. They are trading below their 50-day moving average and are unlikely to recover this year. They might fall further if the reported defaults are greater than expected.

You might buy these bank stocks now for their high dividend yields. TD Bank stock has a dividend yield of 5.18%, and Bank of Nova Scotia has a yield of 6.6%. But note that they have paused their dividend growth until further notice. It might take at least two years for the banks to return to increasing their dividends.

Investor corner

If you want to walk Buffett’s path, wait for the above two bank stocks to fall in the second market crash and then buy them at the dip. If you are in it for dividends, there are stocks like Enbridge and RioCan, which have dividend yields as high as 8% and 10%. They offer a better risk-to-reward ratio.

Should you invest $1,000 in Enbridge right now?

Before you buy stock in Enbridge, consider this:

The Motley Fool Stock Advisor Canada analyst team just identified what they believe are the Top Stocks for 2025 and Beyond for investors to buy now… and Enbridge wasn’t one of them. The Top Stocks that made the cut could potentially produce monster returns in the coming years.

Consider MercadoLibre, which we first recommended on January 8, 2014 ... if you invested $1,000 in the “eBay of Latin America” at the time of our recommendation, you’d have $21,345.77!*

Stock Advisor Canada provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month – one from Canada and one from the U.S. The Stock Advisor Canada service has outperformed the return of S&P/TSX Composite Index by 24 percentage points since 2013*.

See the Top Stocks * Returns as of 4/21/25

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Puja Tayal has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Enbridge. The Motley Fool recommends BANK OF NOVA SCOTIA.

More on Bank Stocks

customer uses bank ATM
Stocks for Beginners

How to Approach CIBC Stock in 2025

CIBC stock is one of the best banks out there, and yet it doesn't really get the attention it deserves.

Read more »

open vault at bank
Stocks for Beginners

3 Canadian Bank Stocks to Shield Against Market Downturns

Bank stocks are some of the safest to hold on to, but these three are the best out there.

Read more »

clock time
Bank Stocks

1 Magnificent Financial Stock Down 23% to Buy and Hold Forever

This top TSX financial stock is trading well below its recent peak, but its long-term fundamentals remain rock solid.

Read more »

dividend growth for passive income
Bank Stocks

This Canadian Bank Pays 4.75% and Could Double Your Money by 2030

A Canadian bank is a top pick for its lucrative dividend and potential to double your money in five years.

Read more »

stock research, analyze data
Bank Stocks

Where Will Brookfield Corporation Be in 4 Years?

With strong earnings, big capital to deploy, and smart growth bets, Brookfield Corporation (TSX:BN) could be a long-term winner worth…

Read more »

woman looks out at horizon
Bank Stocks

This Canadian Bank Stock Down 14% is an Income Investor’s Dream

Scotiabank’s short-term stumbles have opened a window of opportunity for income investors to collect a juicy dividend.

Read more »

3 colorful arrows racing straight up on a black background.
Bank Stocks

I’d Put $7,000 in This TSX Stock Before it Explodes Higher

Are you looking for a superb stock that can provide decades of income growth? This TSX stock screams opportunity right…

Read more »

An investor uses a tablet
Bank Stocks

Where Will TD Bank Be in 2 Years?

TD stock has come under scrutiny over the last few years, but does the future look brighter?

Read more »