It’s no secret that Berkshire Hathaway (NYSE:BRK.A, NYSE:BRK.B) CEO Warren Buffett likes to buy bank stocks. He’s been known to own shares of big-time lenders like Wells Fargo (NYSE:WFC), JPMorgan Chase (NYSE:JPM), Goldman Sachs (NYSE:GS) and Bank of America (NYSE:BAC). Yet, while he’s eased up on some banking names, Buffett’s actually increased his position in BAC stock.
I’m certainly not suggesting that anyone should just mimic Buffett’s trades. It’s essential to do your own due diligence and learn about the companies you’re investing in. After all, you’re responsible for your own finances.
That being said, it’s newsworthy whenever the Oracle of Omaha makes a large-scale investment. And in the case of BAC stock, it’s particularly notable that Buffett chose to add to his BAC position even while lightening up on other bank stocks.
Concerning this topic, no specific commentary from Buffett is available yet. However, we can made educated guesses as to why he would favor BAC stock now. And in doing so, we could build a bullish case and possibly even take a long position ourselves.
A Closer Look at BAC Stock
In general, financial-sector stocks haven’t fully rebounded from the impact of the novel coronavirus. WFC, JPM, GS and BAC stocks are all trading considerably below their pre-pandemic peaks.
Out of those big-name financial stocks, however, BAC may offer the best value. And Warren Buffett is known the world over as a legendary value hunter.
One well-known valuation metric is the trailing 12-month price-to-earnings ratio. For BAC stock, this number is 12.27 and it compares favorably to the company’s banking-sector peers.
Looking at it from another angle, we can observe that BAC stock’s 52-week ratio is $17.95 to $35.72. This suggests that the stock still has room to run to the upside. And while shareholders are waiting for that to happen, they can collect distributions from BAC’s 2.86% forward annual dividend yield.
Raising the Stakes
It’s true that Buffett hasn’t spilled the beans on what he was thinking when he reallocated his financial-sector holdings. On the other hand, a recent U.S. Securities and Exchange Commission Form 13-F filing at least gives us a peek at what Berkshire owns and what it doesn’t own.
For example, we now know that Berkshire Hathaway recently sold 1,920,180 shares of GS stock. Not only that, but Berkshire also sold 85,630,213 of WFC stock and 35,506,006 shares of JPM stock.
Should we conclude, then, that Buffett has given up on the banking sector entirely? Not at all. In fact, Berkshire bought roughly 13.6 million BAC stock shares from July 31 to Aug. 4. We’re talking about $337 million worth of BAC shares at that time.
By a recent count, Berkshire Hathaway holds 1.03 billion BAC shares, which would be worth around $25.8 billion. That translates to an 11.9% stake in BAC stock. Without saying a word, Buffett’s making a loud and clear statement about his outlook for Bank of America.
Lenders Will Lend Again
One issue that might bother prospective BAC stock investors would be banks’ diminished lending activity. That, more than anything else, is probably what’s kept the BAC share price so low.
But as InvestorPlace contributor Will Ashworth argues, “Most of my colleagues believe that once the economy gets back to normal, the big banks will all return to making lots of money. I tend to agree.”
Until that happens, banks have had to store money to cover writedowns as some businesses and individuals default on their loans. Bank of America has been preparing for this for quite a while.
Specifically, during 2020’s first half, Bank of America kept $9.9 billion in reserve in order to cover credit losses that might arise. That’s a wise strategy, and it’s proof positive that the company will do what’s necessary to protect itself until the economy picks up.
The Bottom Line
Given Berkshire’s recent share purchases, it appears that Buffett appreciates the value proposition in BAC stock. Perhaps he likes the way that Bank of America is protecting itself while the economy recovers.
Really, there’s no way to know what’s going on inside of Buffett’s head. The best we can do is track his trades but make our own decisions in the end.
On the date of publication, David Moadel did not have (either directly or indirectly) any positions in the securities mentioned in this article.