Renowned investor and in Berkshire Hathaway (NYSE:BRK.A, NYSE:BRK.B) CEO Warren Buffett is known for really liking a handful of mega-cap names. Bank of America (NYSE:BAC) is among them, and Buffett’s been known to own sizable quantities of BAC stock.
Perhaps it could be argued that Buffett likes bank stocks in general and doesn’t have any particular preference for BAC stock. After all, Berkshire has been known to take positions in big-bank names like Wells Fargo (NYSE:WFC), JPMorgan Chase (NYSE:JPM) and Goldman Sachs (NYSE:GS).
A recent U.S. Securities and Exchange Commission Form 13-F filing, however, shed some new light on what Buffett might be thinking in 2020 when it comes to bank stocks. In particular, some shifting and reallocating suggests that the Oracle of Omaha might like Bank of America more than other financial-sector names.
Does this mean that retail investors should follow Buffett’s lead and buy BAC stock too? The decision is yours, but Bank of America’s value proposition appears compelling for prospective shareholders.
A Closer Look at BAC Stock
Buffett is known as a value investor, and it’s hard to find a better value than BAC stock today. Even with the novel coronavirus putting tremendous pressure on banks, this stock still offers a forward annual dividend yield of 2.74%.
Moreover, BAC stock’s trailing 12-month price-to-earnings ratio is a very reasonable 12.42. This suggests that Bank of America is still profitable even during a pandemic, and it’s possible that the share price doesn’t fully reflect this.
BAC stock was sitting comfortably between $34 and $35 prior to the onset of the coronavirus. Plus, there once was a time when the shares traded above $50. I’m not trying to imply that BAC shares will reach that level this year. Nonetheless, the upside potential is there, especially if the American economy recovers.
Berkshire’s Big Bet on BAC Stock
What Buffett didn’t say out loud about his allocations, the SEC revealed through the aforementioned 13-F filing. That’s perfectly fine since actions speak louder than words anyway.
And according to Berkshire’s actions, Buffett is decidedly de-emphasizing some mega-banks. For instance, Berkshire recently sold 1,920,180 shares of Goldman Sachs stock. The company also unloaded 85,630,213 of Wells Fargo stock as well as 35,506,006 shares of JPMorgan Chase stock.
So, should we conclude that Buffett hates the banking sector as a whole? Not at all, as Berkshire purchased roughly 13.6 million BAC stock shares from July 31 to Aug. 4. Evidently, the company paid a whopping paid $337 million for all of those BAC shares.
The numbers get even bigger than that if we dig a little deeper. Since July 20, Berkshire bought around 85.1 million BAC stock shares, bringing the total holdings to 1.03 billion shares, valued at approximately $25.8 billion. That would equate to an 11.9% stake in BAC stock, amazingly.
It’s a Bargain, Plain and Simple
On the face of it, observers might find it shocking that Berkshire would unload so many big-bank stock shares while increasing its position in BAC stock.
Yet, it makes perfect sense when we think of Buffett as the consummate bargain hunter. While some other bank stocks trade at a premium to their book value, BAC stock is actually priced at a 10% discount to its book value.
Furthermore, Bank of America only pays out a measly 0.13% yield on its interest-bearing deposits. That’s not wonderful for the bank’s clients, but it’s evidence that Bank of America has ultra-cheap access to capital.
Besides, BAC stock’s aforementioned P/E ratio is competitive among mega-bank stocks. Sure, the P/E ratio is an old-school valuation metric, but Buffett is old-school and he’s done quite well for himself.
The Bottom Line
No one is claiming that Buffett’s track record in the markets is perfect. However, his vast wealth is a result of smart decisions made over a lifetime.
Is Buffet’s decision to load up on BAC stock a smart one, then? Only time will tell, but if Bank of America is good enough for the Oracle, maybe it should be good enough for you too.
On the date of publication, David Moadel did not have (either directly or indirectly) any positions in the securities mentioned in this article.