Building Generational Wealth From a Buffett-Like Opportunity

Warren Buffett’s first big win skyrocketed his status from a small-time hedge fund manager to multimillionaire… and set him on the path to becoming a billionaire and the world’s most successful investor.

But the story behind how he bagged that first big win isn’t as well-known.

In this month’s issue, Chief Analyst Adam Galas shares the surprising truth about what created that opportunity… and how we have a similar setup right now.

Today’s recommendation is a world-class company with the potential to create generational wealth… something right out of Buffett’s little-known playbook.

Shares are down 21% so far this year, thanks to the negativity surrounding its sector. But we believe this opportunity won't last long.

Adam will share everything you need to know, including what the market is getting wrong… And why you should take advantage today before it catches on to set yourself up for triple-digit returns in just a few years.

Happy SWAN (sleep well at night) investing,

Brad Thomas Editor, Fortress Portfolio

Most people have heard of Warren Buffett, the man considered the greatest investor of all time.

But something most people don’t know is the scandal at the center of one of his professional career’s first big winners.

It all started back in the early 1960s with a man named Anthony “Tino” De Angelis.

De Angelis was a former commodity broker. He was also one of the greatest con artists of his day.

Fresh off the success of a scam in which he defrauded a government program meant to fund school lunch for tens of thousands of dollars, De Angelis set his sights on the score of a lifetime.

He created Allied Crude Vegetable Oil Company to take advantage of another government program that sold surplus food to poor countries. Slowly, he narrowed his focus to soybean oil. And that’s where the plan hatched.

Allied Crude Vegetable Oil had substantial soybean oil inventory. But De Angelis wanted to corner the whole market.

So he used the soybean oil reserves as collateral for loans from over 50 banks and institutions. Allied’s biggest eventual lender was American Express (AXP).

In the 1960s, American Express was known for credit cards and traveler’s checks. But it also had a profitable new side business called “field warehousing.”

American Express would loan companies money using physical goods and commodities stored at its warehouses as collateral.

Initially, De Angelis borrowed a few million against very real soybean oil. He would buy soybean oil futures and then use his company’s money to buy the oil, driving up the price.

Then he borrowed against his oil to buy more oil and increase the price even more. The more valuable oil then provided him with even more borrowing power to keep the cycle going.

But it didn’t take long before he got greedy and started replacing the real oil with saltwater…

Now, American Express thought it did its due diligence by checking Allied’s oil tanks. When the inspectors opened the tanks, sure enough, they saw oil. But they forgot that oil floats and missed the water just a few feet under the surface.

Meanwhile, De Angelis continued his cycle. Using his borrowed funds – with falsified stores of soybean oil as collateral – to buy steadily more soybean oil and then “store” it in American Express’s warehouses.

Within a few months, he had borrowed $150 million, backed by 400,000 fictional pounds of soybean oil – more than existed in the entire United States.

Eventually, a whistleblower helped American Express catch onto the fraud. It finally discovered that what was supposed to be $150 million in soybean oil… was actually only $6 million.

Once the fraud was exposed in November 1963, soybean oil prices crashed 20%.

Allied Crude Vegetable Oil filed for bankruptcy.

De Angelis also filed for personal bankruptcy.

And 51 companies were left holding bad loans.

All told, the economic damage caused by De Angelis’s fraud came to about $1.6 billion in today’s money.

And the one bearing the worst of the brunt was American Express.

It was forced to file bankruptcy for its warehouse subsidiary… and its stock fell 50% on fears that it would sink the whole company.

Enter Warren Buffett.

His partnership, which was run like a hedge fund, had about $50 million ($500 million in today’s money) under management when American Express fell off a cliff.

Buffett theorized that a $100 million loss wouldn’t kill the 113-year-old company, and its brand would remain intact.

After all, American Express was a victim of fraud and was merely embarrassed at having been swindled. Its core business wasn’t damaged. And Buffett believed its stock price would eventually come back.

He took $20 million, 40% of the partnership’s capital, and bought 5% of Amex at an average price of $0.94 per share in early 1964.

And he ended up being right.

He sold most of his stake for about $5 per share in 1967, a 400% return. That $80 million gain, almost $1 billion in today’s money, in a little over a decade made Buffett a legend.

So you see, without Anthony De Angelis and his soybean oil scam, Buffett might have remained a small-time hedge fund manager.

Instead, his legendary big bet on American Express after it crashed 50% helped him become the world’s fifth-richest person and cement his reputation as the most successful investor in the world.

The reason you may never have heard of “the great salad oil swindle” is because it was exposed over the same weekend President John F. Kennedy was assassinated. But the lesson isn’t one we should let history forget.

Here’s why I’m telling you this fascinating tale of fraud and legendary value investing…

Today, there’s a similar opportunity in another world-class financial company. It can help you potentially earn Buffett-like returns from a beaten-down, blue-chip bargain hiding in plain sight.

One that, like American Express after the salad oil swindle, could quadruple in value in the next five years.

Shares are down 21% so far this year, thanks to the negativity surrounding its sector. But we believe this opportunity won't last long. In fact, as early as its earnings report tomorrow, we expect to see things starting to turn around for this company's share price.

I’ll tell you all about this brand-new addition to our Fortress Portfolio in today’s issue… what the market is getting wrong… and why you should take advantage today before it catches on to set yourself up for triple-digit returns in just a few years.

At Fortress Portfolio, we aim to buy and hold forever (or until the thesis breaks). From there, we collect dividends and watch our income grow through all market conditions.

Which is why it’s important to take an initial position at a good value.

We strive to buy $1 in value for $0.75 that grows steadily over time and capture superior returns through yield, growth, and valuation returning to normal.

That’s exactly the setup we have today with US Bancorp (USB).

Founded in 1929 in Minneapolis, Minnesota, USB is a 94-year-old bank with an impressive track record.

It’s survived 15 recessions, the Great Depression, inflation as high as 22%, interest rates as high as 20%, 23 bear markets, and the Great Financial Crisis (during which it remained profitable every single quarter).

For context, during the Great Depression, which began just as USB was founded, 9,000 banks failed. But USB remained afloat, thanks to conservative banking practices that have continued for nearly a century.

Today, it’s the fifth-largest bank in America. It’s a titan in every kind of lending other than investment banking. That includes:

And now, just like it went crazy with terror over American Express in 1963, the market has thrown USB out with the regional banking bathwater.

From its last record high in January 2022, USB's peak decline was 45% – almost as bad as American Express’s drop. That includes a 36% crash in recent weeks triggered by the regional banking crisis.

In other words, it’s trading as if its fundamentals were falling off a cliff.

And that’s giving us the chance to buy $1 in value for just $0.56 while locking in a very safe 5.4% yield.

Now, we don’t recommend a company just because it’s trading at a discount. We want to be reasonably certain its growth prospects still look promising from its depressed prices.

And before I even get into what makes USB different from the banks involved in this year’s bank failure crisis… Let me give you the perfect example of how irrational the market is on USB.

During the Pandemic low, when the global economy was on lockdown and the St. Louis Fed was warning about potential 50% unemployment… USB bottomed at a price-to-earnings (P/E) ratio of 8, pricing in -1% permanent growth.

During the Great Recession, the worst economic catastrophe in 70 years, when capitalism seemed to be collapsing and the stock market fell 57%... USB bottomed at a P/E ratio of 6, pricing in permanent -5% growth.

Today, USB is trading at 7.5 times earnings, pricing in -2% permanent growth. So the market is indicating it anticipates something in between those two historic crashes.

Meanwhile, analysts are expecting something very different from USB in 2023, a year where we’re predicting a recession: 29% growth.

They’re also predicting further growth of 12% in 2024 and 11% in 2025.

And the long-term consensus growth for USB from 28 industry analysts is 13%.

Now, those earnings estimates could fall as the economy weakens. But for 20 years, tens of millions of income investors have consistently paid 13.1 to 13.7 times earnings for USB with a 20-year average of 13.6.

In other words, USB is 46% historically undervalued given current growth expectations. That makes it the most undervalued company in Fortress Portfolio by a wide margin.

During the Pandemic, when the US economy contracted 2.8%, twice the average recession since WWII, USB’s earnings fell 26%.

If USB’s earnings fell the same amount, then its P/E is 9.5, and it’s “just” 30% undervalued.

If USB’s earnings were to collapse 50%, similar to the Great Recession, then you’re still buying one of the world’s best banks for fair value. That is the ultimate margin of safety.

The current economist consensus is that this will be the mildest recession in US history and that the economy will grow 0.9% for the full year.

And rather than growing -2%, as is currently priced in, USB is growing faster than any other large US bank.

USB isn’t just a regional bank; it’s the king of regional banks.

Now, you may get spooked hearing “regional bank.” After all, they were at the center of the recent banking crisis.

And regional bank names like Silicon Valley Bank (SIVBQ), Signature Bank (SBNY), and First Republic (FRC) were plastered all over the news accompanied by the words “failure,” “insolvency,” “bank run,” “collapse,” etc. just a few weeks ago.

So let’s take a look at what makes USB different and why it isn’t exposed to the same risks that took down those regional banks.

First, just 7% of SVB’s $170 billion in deposits were insured. For comparison, 48% of USB’s $525 billion in deposits are.

On top of that, SVB was a tech startup-focused bank with 17 branches in 2 states. And USB has 2,000 branches in 26 states.

What about USB’s fundamental risk of collapse? Here are what the rating agencies say:

What about the risk of a bank run? All four rating agencies rate USB’s deposit risk as AA, with a 0.51% chance of a bank run.

According to a company spokesperson, deposits are stable and USB is adding new accounts and customers every day.

Next, USB isn’t a high-risk regional bank like First Republic. It’s actually one of the 11 savior banks that sent $30 billion in deposits to stabilize First Republic.

That puts it in good company with other banking leaders like JPMorgan, Bank of America, Citigroup, Wells Fargo, Goldman Sachs, Morgan Stanley, Bank of New York Mellon, State Street, PNC, and Truist Financial.

Another potential risk in the financial sector you might have heard about is the $620 billion in unrealized bond losses that all U.S. banks have right now.

These amounted to $16 billion at SVB and were the reason it failed. To pay off all depositors, it would have had to sell all their bonds. And the $16 billion loss was equal to the bank’s net equity. In other words, SVB was insolvent.

What about USB? As of its most recent quarterly filing, its unrealized bond losses are 47% of Tier 1 capital. That’s $23 billion in unrealized losses that only become real if USB is forced to sell all its bonds.

Let’s say that happens. USB’s $50 billion in equity would fall by $23 billion, but it would remain solvent.

Not only is that prudent, but it’s also ahead of the curve when compared to other banking leaders. The same can’t be said of JPMorgan, Bank of America, or Schwab.

Plus, before that possibility even pans out, USB has hundreds of billions it can borrow from the Fed against the face value of its risk-free bonds. In other words, there is no way USB can fail the way SVB did.

But what about the risk of a commercial real estate crash? Regional banks own 67% of the commercial real estate loans in America. And 50% of those, or $1.5 trillion, are coming due in the next two years.

In a worst-case scenario, in which the Fed keeps rates at 5% through the end of 2025, Morgan Stanley estimates that commercial real estate prices could fall up to 40%. That’s slightly worse than the Great Recession.

In other words, a commercial real estate crisis could potentially trigger more regional banking stress and even a few more failures. But not at USB, and here’s why.

Only 14% of USB’s $55 billion loans are commercial real estate. The bank has loan loss provisions, or loss reserves, for 2.4% of those loans.

But most importantly, at the end of 2022, only 0.61% of USB’s commercial loans were failing.

That makes us confident it won’t get wiped out in a worst-case scenario.

USB is the anti-SVB. Yet Wall Street is pricing USB as if its fundamental risks were worse than during the Pandemic… That’s absurd.

Morningstar calls USB the “lowest risk” regional bank. And we agree. USB isn’t engaged in any of the risky practices as these failed banks.

Plus, it has even more safety built in than some of the biggest banks in the world to fortify itself if other unforeseen risks surface in the future.

So we’re not worried about USB experiencing the same outcome as we saw in the crisis earlier this year.

USB’s earnings might fall in 2023 during a mild recession. But they are extremely unlikely to fall enough to put the 5.4% dividend at risk.

What’s the actual risk of a dividend cut?

Based on the 3,000-point safety and quality model Wide Moat uses that consists of over 1,000 metrics, I estimate a 0.5% chance USB cuts its dividend.

And even if we end up in a severe recession, the odds are at about 2%.

That’s a 5.4% yield you can trust… From a bank that is so well run that it didn’t have a single quarter of negative earnings in the Great Financial Crisis.

Today, its balance sheet is even stronger. And, according to S&P and Goldman Sachs, its risk of failure is 1/4th that of a nuclear apocalypse.

The dividend payout ratio of 41% is very safe. For it to rise to 100% and put the dividend at risk would require a 59% earnings crash in 2023.

And even in the past few market crashes, that’s something we didn’t see from USB:

Source: FAST Graphs, FactSet

A lot of this has to do with the team managing this bank and safeguarding depositors’ hard-earned savings.

CEO Andy Cecere has been with the bank since 1985. That’s 38 years. He was chief financial officer from 2007 to 2015 (including during the Great Recession). Chief operating officer from 2015 to 2017. And CEO since 2017.

USB never lost money during the Great Recession, and Cecere was the man in charge of its finances in this ultimate baptism by fire.

So while we can never be 100% certain about the future – after all, according to two of the best investors in history, Howard Marks and John Templeton, even if all the data today says a company is bulletproof, you can only be 80% confident that the fundamentals won’t deteriorate in the future…

So we feel very comfortable adding USB to our Fortress Portfolio. 80% certainty is the upper limit of confidence, and that’s what I have about USB right now.

Because anyone buying USB today has the potential to earn incredible returns.

Let’s take a look at the kinds of returns buying USB today could potentially deliver in the coming years.

These are the consensus total return estimates at the end of each year if USB grows as expected and returns to historical market-determined fair value of 13.6 times earnings.

That gives us the chance to lock in a safe 5.4% yield today and potentially double our money in two years… triple it in four years… and quadruple it in six years.

Think these forecasts are overly bullish? Just take a look at the returns USB has delivered from its historical bear market lows.

US Bancorp Best Returns From Bear Market Lows Since 1984

Source: Portfolio Visualizer Premium

That’s why I believe we have a buying opportunity in US Bancorp that could result in generational wealth.

The last time USB was even close to this undervalued, during the Pandemic, it delivered 112% returns in less than two years.

That compares to the returns Buffett earned with his American Express bet after the salad oil scandal.

If you buy US Bancorp today, you can earn Buffett-like returns from this beaten down world-class blue-chip bargain hiding in plain sight.

And here’s why it’s important to act immediately…

USB reports earnings on April 19, before the market opens. And at 7.5 times earnings and a 44% historical discount, USB is priced for catastrophic news that is very unlikely to show up in earnings.

In other words, by merely sucking less than the market fears, USB could potentially pop 5% to 10% on earnings day, when management confirms its world isn’t ending.

So I suggest positioning yourself right as the market opens to take advantage of this mispricing.

And even if you’re not able to lock in shares then, don’t worry. There’s plenty of upside with USB, and you’ll still be able to capture the bulk of future gains, even if the stock rises tomorrow.

Again, there’s no risk-free investment in the world. So we want to lay out what could go wrong with our thesis on USB.

In the short term, we have the recession, which might be worse than currently expected.

That might be because inflation proves sticky, and the Fed is forced to keep rates at 5% or even raise them to 6% or 7%. If the Fed keeps rising rates through the recession, then a severe recession like that of 1980 and 1981 could happen.

In the long term, if the government imposes stricter banking regulations on regional banks, it could reduce their long-term growth rates by as much as 20%, according to analyst firm Stiefel.

USB is regulated almost as strongly as the mega banks because it’s the fifth largest bank. Any additional regulations to regionals aren’t likely to significantly impact its growth rate.

And with a very safe yield of 5.4%, as long as USB grows 4.8% or faster, it’s likely to match or beat the S&P 500, but with triple the yield.

One final risk to consider is that USB’s acquisitions of Union Bank in 2022. That was its biggest since the Great Recession.

This large acquisition is complex. And it’s the reason S&P and Moody’s have downgraded USB to “negative outlook.” That means a 33% chance it gets downgraded (to A) within the next two years.

Union Bank added a lot of California assets. And while USB has an impressive history of executing well on such acquisitions, there is no guarantee that its brilliant CEO will be able to pull this one off, too.

Now, we don’t expect these Union Bank assets to be a ticking time bomb or another SVB or First Republic. The unrealized losses from the Union Bank deal are just $900 million, increasing USB’s unrealized losses by just 5%.

In other words, USB did its homework when it bought Union Bank and ensured that its assets were high quality and that it was a conservatively managed bank, just like USB.

But of course, we’ll keep an eye on the bank’s performance, fundamentals, and bottom line… and alert you of any action you may need to take in case of changes to our investment thesis.

Just like American Express became obscenely undervalued during the great salad oil swindle in 1963, today, USB is trading as if it were a dying company.

It’s priced for -2% growth but is growing at 13%.

It’s priced as if it were First Republic, but USB is one of the 11 savior banks that is bailing out First Republic.

USB is trading at a lower valuation than during the Pandemic when the economy was in lockdown and GDP contracted more than 8% in a single quarter.

Now, we’re facing a mild recession, but you couldn’t tell by looking at USB’s price chart.

That means you can buy one of the best banks in America and lock in a very safe 5.4% yield. And potentially double your money in two years, triple it in four, and quadruple it in six.

Just like Warren Buffett, we’ll focus on the long-term trajectory and facts behind an undervalued situations. And we’ll build our fortunes on it returning to its usual status.

Action to Take: Buy shares of US Bancorp (USB) Buy-up-to Price: $62.84 Position Sizing: 4.4% of your Fortress Portfolio. Or up to 15% in an individual portfolio. Risk Management: 30% hard stop loss ($24.96 for our tracking purposes)

Each month, I bring you an update on the state of our economy.

We intend to hold our Fortress positions through market ups and down. But it's important to be aware of what is going on in the market and around the globe.

That way, we can find the best opportunities... and we can brace ourselves for any downturns as well.

As of now, the economic data is showing a recession could be coming in two to four months, starting around July.

The bond market agrees, expecting the Fed to pause interest rates at 5% and then start cutting in July, due to the recession.

The jobs market remains strong with over 1 million jobs created in the last three months.

However, the jobs report (236K last month) cutoff for the surveys was March 12, four days after the start of the banking crisis.

The banking crisis has calmed down with deposits starting to slowly return to regional banks.

However, deposits are still steadily leaving checking accounts and moving to money market funds, which pay over 4% while national checking accounts pay 0.2%.

This means higher funding costs for banks. And at the end of last year, bank lending standards were rising to historically recessionary levels.

In the last two weeks of March, bank lending fell $105 billion, the sharpest two-week decline in recorded history going back to 1970.

In other words, we have a mild credit crunch due to the banking crisis which is likely to be a protracted event.

This crisis is likely similar to the savings and loan (S&L) crisis of the 1980s. The Fed also caused that by Fed raising short-term rates quickly. That caused bank funding costs to rise above the interest rates they were charging for loans.

Over 13 years 30% of S&Ls failed and Congress had to bail out the industry.

Historically, Fed hiking cycles always lead to some kind of mild financial crisis.

A financial crisis – and even a mild recession – does not mean another Great Financial Crisis.

Doomsday prophets like Kiyosaki and Roubini will always spin a plausible-sounding story about why the next crisis is another Great Financial Crisis. But remember: That was the worst economic catastrophe in 70 years. So it's highly unlikely we'll have such a severe situation again right now.

Right now, the biggest risk to banks is commercial real estate, with $1.5 trillion in loans coming due in the next two years.

If the Fed were to leave rates at 5% for two years, it could cause up to a 40% decline in commercial real estate prices, mostly in the office real estate investment trust (REIT) sector.

However, the Fed won’t keep rates at 5% for two years. It plans to cut three times next year and to be 3% by the end of 2025 when the wall of commercial loans are due.

There is an ocean of private equity money waiting to buy distressed real estate at much more attractive valuations. That's why Morgan Stanley calls “up to 40% decline in real estate prices” the worst-case scenario, not the base-case.

In fact, Blackstone just announced it has closed on a $30 billion fund to buy cheap real estate assets in the coming months and years.

Yes, 67% of commercial real estate loans are owned by regional banks. And yes, even 3% rates in 2025 will lead to some defaults and regional bank loan losses.

But the losses will be mild, as will the recession.

Here is the current FactSet economist consensus for U.S. growth.

Historically, economists always underestimate gross domestic product (GDP) contraction in recessions.

So likely we’ll get a recession. But it very well could be the mildest in history. (For context, the current record for the mildest recession was a 0.4% contraction in 2001.)

That's because wage growth for the lowest-income Americans is the strongest it's been in decades. It's up to 15.2% for leisure and hospitality, where the most jobs are being created.

The middle class has been hit hardest by inflation. But Bank of America estimates the excess savings for the middle class will last until the end of 2024. And the upper-income excess savings will last until the end of 2026.

That’s because the Fed estimates America has $4 trillion in excess savings compared to the pre-pandemic trend.

State and city rainy day funds have never been so full.

Corporations have $7 trillion in cash on the balanced sheet.

The country has never been more ready for a recession. And this one is the most anticipated in history, giving us plenty of time to prepare.

In other words, layoffs are likely to be mild, consumer spending strong, and inflation should fall steadily and rapidly if we get into a recession.

The Fed plans to start cutting no later than September 2024, and probably sooner if inflation comes down as the recession is likely to cause.

And the economy won’t need much stimulus given that the world is still awash in cash.

Stocks are priced at 18X forward earnings and closer to 20X, factoring in the likely mild recession.

That means a likely 15% to 30% decline in the coming months, which would only mean a historically average bear market.

S&P Bear Market Low Scenarios (14 P/E Base Case)

Source: Wide Moat Research Terminal, Bloomberg

But it won’t feel average. Recessions never do.

The historical market bottom is likely near the debt ceiling crisis, which should come around September or October.

I will talk about the debt ceiling crisis in the next monthly issue. And also in the upcoming video updates.

Stocks falling 15% to 30% within a few months will feel like the end of the world. The doomsday prophets will tell you a 50% crash is coming. That banks are going to implode, and unemployment will soar.

But I want to tell you: ignore the noise.

I track America’s financial stress via St. Louis and Chicago Fed financial stress indicators each week, which include 123 metrics updated weekly, yield curves, credit spreads, loans, and loan default rates for every kind of lending.

The banking crisis caused a sharp spike in financial stress. And in the last two weeks, it’s back below average since 1993 and 1971.

If a crisis came, the data would pick it up. And you can bet I’d tell you about it in these monthly issues and the weekly video updates.

Source: Gurufocus Premium

I welcome your questions and will try to answer as many as I can in the weekly update videos and these monthly newsletters.

We didn’t get any new questions this month, so please send in any concerns or comments about our recommendations, portfolio, the economy, market, our safety metrics, or anything else.

Just remember I can’t give individual investment advice. But I can provide information and general guidance for the average investor. Write in with your questions here.

Safe investing,

Adam Galas Chief Analyst, Fortress Portfolio