On the whole, financial institutions haven’t had a wonderful year so far. The onset of the novel coronavirus made it difficult for lenders like Bank of America (NYSE:BAC) to make money. It also put pressure on the BAC stock price.
Unlike technology stocks, banking-sector stocks have yet to stage a sharp recovery. There may be exceptions to this, but BAC stock isn’t among them as investors are still waiting to get back to the break-even point this year.
Momentum-focused traders may choose to view this as a bad thing. On the other hand, Berkshire Hathaway (NYSE:BRK.A, NYSE:BRK.B) CEO Warren Buffett evidently doesn’t view the share-price pressure in BAC stock as a problem. Rather, he apparently sees it as an opportunity to snap up more shares at a deep discount.
I recall hearing in the past that Bank of America is Buffett’s favorite bank to invest in. The Oracle of Omaha’s recent addition to his already sizable stake in BAC stock is proof positive that he truly believes in this banking giant’s future.
Still, I’m not encouraging anyone to simply parrot Buffett’s investments. It’s important to evaluate the stock on its own merits. The billion-dollar question (literally), then, is whether Buffett’s doubling down on BAC stock will pay off.
A Closer Look at BAC Stock
Historically, BAC stock has been a good one to buy and hold after it crashes. If you’ve been trading for a while, you might recall the mind-numbing collapse in the BAC share price from $50 in early 2007 to less than $7 in 2008.
All these years later, BAC stock hasn’t gotten back to $50, but it was chugging along smoothly at $35 early this year. Then came the coronavirus and BAC shares tumbled down to the $18 area in March.
By the end of July, BAC was close to $25 and with a trailing 12-month price-to-earnings ratio of 11.97, it seems like a bargain. Income-focused investors should also appreciate BAC stock’s forward annual dividend yield of 2.89%.
Buffett Goes All In
When Buffett likes a company, he really likes it. This is certainly the case when it comes to Buffett’s stake in Bank of America. In fact, Berkshire Hathaway added to its BAC stock position three times during the past few weeks.
Recently, if you can believe it, Buffett and his company purchased $1.7 billion worth of BAC shares over the course of just a couple of weeks. With those additions, Berkshire Hathaway’s position in BAC stock currently exceeds 1 billion shares.
Berkshire Hathaway’s 11.8% stake in Bank of America represents the second-largest position in the firm’s portfolio. It’s also, by far, Berkshire’s biggest bank-stock holding.
Rebuilding the Oracle’s Reputation
Millions or even billions of dollars are at stake for Warren Buffett, but there’s more to the story than meets the eye. The Oracle’s reputation is also on the line here.
As I detailed in a previous article, Buffett made a rare misstep in buying Delta Air Lines (NYSE:DAL) and other airline stocks at the worst possible time. Then, to make matters worse, he sold those stocks at the worst possible time.
Could this happen again with Berkshire’s position in BAC shares? If Buffett’s legendary stature is to remain intact, he really needs to hold on to those shares through thick and thin.
Only time will tell, but it seems unlikely that Buffett will get shaken out of his position if the BAC stock price goes down. He made that mistake with his airline shares, but that was more of an isolated incident than a behavior pattern.
In the final analysis, Buffett is adhering to his famous saying, “Never bet against America.” Bank of America, as the company’s name implies, is about as American as it gets. If the nation’s economy recovers – which it should, sooner or later – then the Oracle’s investment should provide strong returns and his reputation will remain fully intact.
The Bottom Line
Is a position in BAC stock a wager on Buffett’s judgment? Perhaps, but fundamentally it’s more of a bet that America will recover from the pandemic. And that’s a bet that has served the Oracle well, time and again.
As of this writing, David Moadel did not hold a position in any of the aforementioned securities.