Investing

Is Wall Street Wrong About This Warren Buffett Owned Stock

Chris MacDonald

Published: June 20, 2024 11:06 am

24/7 Insights:

• Warren Buffett’s Berkshire Hathaway stock holdings have a market value of $387 billion dollars.
• Bank of America (NYSE: BAC) remains a top holding in this portfolio, with a portfolio weighting of more than 10%. 
• Analysts remain bullish on the top U.S. lender, though its consensus price target doesn’t imply much upside.

Warren Buffett has proven his ability to locate and invest in some of the best companies in the world. Even more impressive, his ability to hold onto most positions for very long time frames has allowed investors in Berkshire Hathaway (NYSE: BRK-B) to benefit from long-term compounding trends many active funds don’t see. Buying a given stock when it’s beaten down and no one wants to own it (as in Buffett’s massive stake in Bank of America following the 2008 financial crisis) and being patient is a key strategy that has served the Oracle of Omaha and his investors well. 

Bank of America has absolutely skyrocketed since Buffett’s purchase, and the company has retained its top position in the U.S. financial system. One could argue Buffett’s investment is a key driving factor that has allowed this to happen. On the other hand, one could argue that Bank of America would have likely survived regardless, and Buffett took advantage of a once-in-a-lifetime opportunity.

Now, given how far ahead of the game Buffett is relative to most investors in BAC stock (due to his stock basis), it’s understandable that he’s unlikely to sell. There are a myriad of tax implications that would likely hurt investors more than provide any benefit, with few decent places to put capital to work in the market.

But with a consensus price target only 3% higher than where BAC stock is currently trading, the question is whether Bank of America remains a buy right now. Let’s dive into why Buffett may be holding, and whether investors should do the same.

Is It Smart to Put Fresh Capital to Work in Bank of America Stock? 

Analyst price targets do matter. For investors looking to put their hard-earned capital to work, having a feel for where the experts think a stock may be headed over the next year is important. Indeed, seeing a consensus upside of only 3% (actually a little less than 3% after the stock’s recent moves) isn’t that enticing. Investing in passive index funds may provide better upside, if one believes the consensus targets on funds like SPY or VTI. 

That said, it’s been clear for quite a long time that Buffett has a different investing rationale than the overall market. With so many investors laser-focused on growth (whether it comes from AI-related tailwinds or not), buying out-of-favor companies in cyclical sectors like the financial industry may seem foolhardy. Why put capital to work in a slower-growth sector with heightened risks tied to a potential recession, versus companies that should grow in any macro environment?

The thing is, there’s no such thing as a stock that’s completely decoupled from cyclical forces. Market risk exists everywhere, and while massive lenders like Bank of America are exposed to these trends, it’s also true that Bank of America’s balance sheet is among the best of its peers. This is likely one of the reasons Buffett chose to invest in BAC stock to begin with, and will likely remain key to his long-term investment thesis in the stock.

One could argue that since Buffett has held through this hiking cycle, he may believe that eventual rate cuts and a dis-inversion of the yield curve may be so beneficial for Bank of America it may outweigh cyclical market-related risks. That’s an interesting take, and one I think is worth considering. 

If Buffett Is Holding, Should You?

Warren Buffett’s portfolio structure and investment philosophy isn’t for everyone. He’s an oddity in the investing world, to be sure. And again, given his cost basis on his Bank of America position, there doesn’t seem to be any good reason to sell right now, regardless of where analysts think the stock is headed in the near-term.

His view is long-term. And given the fact that analysts are usually off the mark over near-term time frames, I don’t think Buffett is sweating this lack of market conviction in Bank of America stock. Warren Buffett is up another 17% year-to-date on his holdings in this mega bank, and he may certainly believe the party is just getting started. Indeed, for those banking on a brighter future for America (which is Buffett’s perennial base case), holding on for the ride (and buying when the stock dips) may be a better strategy than listening to the talking heads on Wall Street, at least on this stock.