Buffett's Favorite Dow Stocks Surged This Week

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This week, the Dow Jones Industrials (INDEX: ^DJI) eclipsed 13,000 for the first time since May 2008, while the Nasdaq (INDEX: ^IXIC) broke through 3,000 for the first time in 11 years. A short time after hitting its milestone, however, the Dow retreated and finished about even for the five trading days. Immediately, headlines emerged claiming there was a psychological barrier weighing down the index at this level, that "some investors are worried about Dow 13,000."

Why would that be the case? At this point, it's unclear. After all, the Dow tracks the biggest, most financially stable companies, serves as a leading indicator for the economy, and has risen nearly 100% since hitting a 12-year low of 6,547 on March 9, 2009. Sure, on Wednesday, Ben Bernanke outlined a continued sluggish economic recovery, but for the most part the Federal Reserve chairman was optimistic about the United States and a gradually declining unemployment rate.

Perhaps more importantly, in his shareholder letter this week, the Oracle of Omaha, Warren Buffett, outlined an economy that was getting back on track. He even noted that the housing market would rebound as the supply-and-demand picture reversed course. In Buffett's words:

Every day we are creating more households than housing units. People may postpone hitching up during uncertain times, but eventually hormones take over. And while "doubling-up" may be the initial reaction of some during a recession, living with in-laws can quickly lose its allure.

Bernanke didn't phrase it in those terms, but Buffett never fails to get down to the brass tacks of the matter. After all, what twentysomething living on a futon wants a curfew?

Besides housing, however, Buffett shed some light on another sector that has been off limits for many investors over the past few years: banking. Coincidentally, Buffett's endorsement of the banking sector might have bolstered the shares of JPMorgan Chase (NYS: JPM) and Bank of America (NYS: BAC) during the week. These two stocks were the biggest gainers on the Dow, while another Buffett bank holding was right there with them.

Company

Change

Price-to-Book

JPMorgan Chase6.1%0.9
Bank of America3.2%0.4
Wells Fargo (NYS: WFC) 3.6%1.3

What did Buffett have to say about his bank holdings? Well, generally, that he likes them.

Specifically, he praised Jamie Dimon's leadership at JPMorgan, noting that Dimon's shareholder letter was one of his favorite reads. Buffett also pointed out that Bank of America has made excellent progress in cleaning house, fixing up its balance sheet, and nurturing a huge and attractive underlying business that will endure long after today's problems are forgotten. Finally, Buffett waxed poetically about the "wonderful business" at Wells Fargo, a company so exceptionally managed that Buffett once claimed he would bet his entire net worth on its stock.

Buffett's been known for marching boldly into the fray, and perhaps investors should quit dilly-dallying and jump on the bandwagon. While these Dow stocks attracted his interest, there's another undervalued company Buffett would love to get his hands on if he could. Discover a stock that you can buy now but is too small for Buffett. Find out more in our free report, "The Stocks Only the Smartest Investors are Buying." Considering the broad rebound in the banking sector, this opportunity to get in on the ground level is too enticing to pass up.

At the time this article was published Isaac Pino owns none of the stocks mentioned here. The Motley Fool owns shares of JPMorgan Chase, Wells Fargo, and Bank of America and has created a covered strangle position in Wells Fargo. Try any of our Foolish newsletter servicesfree for 30 days. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

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