You might know him as the Oracle of Omaha or as the CEO of Berkshire Hathaway (NYSE:BRK.A, NYSE:BRK.B). But I’ve always pictured Warren Buffett as an eccentric great-uncle who happens to be a billionaire financial savant. I respect his sixth sense as an investor — and no sane person would impugn his long-term track record. But some critics are questioning Old Buff’s stake in Bank of America (NYSE:BAC) stock.
Some social media pundits have even dared to say that Warren Buffett’s losing his magic touch, especially after the horrendous price decline in Berkshire Holding Kraft Heinz (NASDAQ:KHC). After that misstep, should Buffett’s BAC bet inspire confidence, or skepticism?
Bank-heavy Berkshire
If you’re an investor and you’ve never looked at Warren Buffett’s holdings, shame on you! Stop reading this for a moment and familiarize yourself with Berkshire’s current holdings (in a separate tab, por favor). Then circle back and let’s discuss.
Did you pick up on how financial-sector heavy Berkshire’s holdings are? A gazillion shares (I did a lot of research to come up with that figure) in Wells Fargo (NYSE:WFC), PNC (NYSE:PNC), M&T (NYSE:MTB), JPMorgan Chase (NYSE:JPM), Goldman Sachs (NYSE:GS), Bank of New York Mellon (NYSE:BK), and of course BofA weight the fund so deeply in the financial sector that Berkshire may appear insufficiently diversified.
In that light, Berkshire’s massive 947,760,000-share stake in Bank of America stock looks rather excessive. Besides, Warren Buffett’s supposed to be a value seeker. And BAC’s anything but cheap at the moment, as it’s trading at its highest share price since August of 2006.
On the other hand, the stock’s trading at a trailing 12-month price-earnings ratio of just 12.41 — not too bad, I must admit. BofA’s forward annual dividend yield of 2.18% is respectable. And BAC shares are still nowhere near their 2006 peak in the $54 range. Is it possible that BAC’s a bargain even at its short-term high?
I’m Not Banking on Bank of America Stock
First things first (if I may use that phrase in paragraph number seven): I most definitely do not recommend buying something just because Warren Buffett owns it. At the end of the day, you have to be your own Oracle and do your own due diligence on any investment; wealthy as Buffett is, he won’t reimburse you if you follow his trades and sustain a loss.
Second, I think it’s foolhardy for Buffett to seek an even bigger stake in Bank of America. As InvestorPlace‘s Will Healy reminds us, Buffett “sought permission from the Federal Reserve to take his [Bank of America] stake above 10%” in October. To me, that’s the behavior of an activist investor, not a cautious and measured fund steward; I would even say it’s a bit out of character for Mr. Buffett.
Finally, I would add that the Federal Reserve is likely to end its “pause” and resume its rate-cutting behavior in 2020. And as the Fed itself duly notes (hat tip to InvestorPlace‘s Todd Shriber for this one):
Banks’ interest income for a given level of interest-bearing assets should generally rise as the FOMC raises its policy rate, and as longer-term rates rise, because banks can pass on rate increases to borrowers through floating-rate loans and new fixed-rate loan originations.
If I may take the liberty of parsing this Fed-speak, they’re saying that interest-rate cutting is generally bad news for banks. I’m in no mood to fight the Fed, so Buffett’s bid notwithstanding, I’m putting BAC on the back burner ’til further notice.
Still an Icon
If I sounded a tad harsh on Warren Buffett in this piece, please don’t take it the wrong way; he’s still a legendary investor, possibly even the G.O.A.T. (Greatest of All Time — a 20-year-old taught me that one). But I can respect the man without mirroring his every move. And buying BAC is the wrong move, if you ask me.
As of this writing, David Moadel did not hold a position in any of the aforementioned securities.
