Bank of America Stock and the Buffett Effect

BAC stock looks ripe for a correction, but investors don’t seem to care

Throughout much of 2019, Bank of America (NYSE:BAC) stock has been trading in a defined range. And as recently as August, the stock was firmly below both its 50- and 200-day moving averages.

Bank of America Stock and the Buffett Effect
Source: Jonathan Weiss / Shutterstock.com

However, BAC has not been behaving much like a bank stock lately. Since the beginning of October, Bank of America stock is up nearly 20%. As of this writing, the BAC stock price was $33.32.

The natural question is, why such a jump?

On Oct. 16, BAC posted a positive earnings report, but investors have come to expect that. In fact, this was the 14th straight quarter that Bank of America beat on both the top and bottom line. In fairness, the 7 cent per-share beat in earnings was larger than any of the prior 13 quarters. But that alone wouldn’t seem to justify a stock that looked primed for a predictable 10% bounce.

So, in looking for reasons to explain this anomaly, a news item caught my attention. In October, Warren Buffett’s holding company Berkshire Hathaway (NYSE:BRK.A, NYSE:BRK.B) petitioned the federal government to increase its stake in Bank of America stock.

Look at what’s happened to the stock since then.

Source: Chart courtesy of StockCharts.com

When the “Oracle of Omaha” Speaks

Occam’s razor is a problem-solving principle. It states that when there are multiple hypotheses for how a problem can be solved, the solution with the fewest assumptions should be selected. I think the U.S. economy has a lot of “ifs and buts” associated with it. That’s why the one variable that seems to explain the uptrend in BAC stock is the Buffett effect.

The Buffett effect is a positive (or negative) impact that is felt in the broader market. Or, in the case of BAC stock, on a single equity when Warren Buffett announces he is buying or selling a position.

Now, to be factually accurate, Berkshire’s petition is being described by many analysts as a “formality.” BRK’s stake in Bank of America has been rising organically due to BAC’s share buyback program (which has totaled in the billions). “I don’t think [the petition] is any more than that,” Morningstar’s Greggory Warren told Fortune in a note.

But Are Investors Only Hearing What They Want to Hear?

On the one hand, Berkshire Hathaway is BAC’s largest shareholder. And when faced with a similar situation with Wells Fargo in 2017, Berkshire decided to be sellers, not buyers. Bank of America’s dividend yield may also be a reason for Berkshire’s interest. Buffett has always been a fan of dividend stocks. And with a dividend yield currently around 2.12%, he may feel BAC stock offers good value.

However, it’s not as if Bank of America is Buffett’s only financial holding. Berkshire Hathaway owns approximately $100 billion in financial sector stocks. So, the more I look at Berkshire’s activity, it seems less of a specific endorsement of Bank of America and more of Buffett’s bet against a recession in 2020.

I say this because investors wouldn’t be buying bank stocks if they were thinking the economy was getting long in the tooth.

We Are In a “Goldilocks” Economy

When the bulls and bears are both finding things not to like about the economy, it may be time to just admit that we are in a Goldilocks economy.

  • Revised third quarter GDP came in at 2.1% which was an upward revision from the initial 1.9% reading.
  • The Dow, NASDAQ, and S&P 500 continue to hit new record levels.

But consumer confidence, while still strong, is showing signs of weakening. And retailers that pushed forward their inventories to account for the tariffs are finding that demand is not as robust as they expected.

It’s a muddled picture. But sometimes like Occam’s razor, the simplest explanation is just to go with the flow. And that’s exactly what it seems Warren Buffett is saying about Bank of America stock. With that said, I would bet that BAC stock is due for a slight correction. Although that won’t bother Buffett one bit, you should probably wait to buy on the dip.

As of this writing, Chris Markoch did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2019/12/bank-of-america-stock-and-buffett-effect/.

©2019 InvestorPlace Media, LLC