• Hot Stove Analysis

Recent investments by the Oracle of Omaha tell us there may be a real opportunity brewing in the banking sector.

As I’m sure you know, Warren Buffett loves bank stocks.

As you read this, he has billions invested in companies like Bank of America (NYSE: BAC), Wells Fargo (NYSE: WFC) (although he just sold 10 million Wells Fargo shares recently), American Express (NYSE: AXP), U.S. Bancorp (NYSE: USB) and Goldman Sachs (NYSE: GS). But recently, he started increasing his position in a new bank stock – which is why we’re highlighting it today.

His new favorite bank is JPMorgan Chase (NYSE: JPM). In the third quarter, Berkshire Hathaway invested an additional $13 billion in bank stocks, and $4 billion of that was in JPMorgan Chase.

Why JPMorgan Chase? Because Buffett expects more than 50% earnings growth by the company over the next four years.

Also because he sees value. Large bank stocks began the year with a forward price-to-earnings (P/E) ratio of 12.6 but have become considerably cheaper since. The group now carries a forward P/E ratio of 10.2.

So bank stocks are now undervalued (and who better to judge value than Buffett?), and he’s adding JPMorgan Chase more aggressively than any other bank. This is definitely something to keep at the top of our watch list. On a move above $112.50 (which represents strength above the most recent resistance level), we’d be interested in a quick-hit trade opportunity in The War Room.