Berkshire Hathaway owns dozens of stocks in its public equities portfolio. Behind Apple, the top holding by a mile, the conglomerate has a huge position in Bank of America(NYSE: BAC). The financial services giant represents over 10% of the portfolio, valued at $37 billion. So should you buy this top Warren Buffett holding with $100 right now?
Here are some important factors to consider before you decide to follow the Oracle of Omaha and scoop up this bank stock.
Notable competitive advantages
It's not difficult to recognize Bank of America's numerous competitive advantages. The business has a powerful brand that's recognized across the globe. This helps draw in customers who trust the bank's long and successful history.
Bank of America also has a wide reach and scale. It has operations in over 35 countries and has the resources to invest in its branch network and digital foundation. This provides easy distribution to attract massive amounts of low-cost deposits that can be used to fund loans.
And finally, the company operates a diversified revenue model. Bank of America is involved in consumer and commercial banking, as well as wealth management and capital markets activities. This helps it navigate various economic scenarios better than singularly focused banks.
This doesn't mean that Bank of America is immune from the competition. It's quite the opposite situation, actually. The business faces ongoing threats from other massive money-center banks, regional financial institutions, community banks, and smaller fintech firms. It's safe to assume that Bank of America will have to stay on top of its game to keep its existing customers satisfied while continuing to bring on new ones.
Understanding macro factors
At a high level, a typical bank operates by taking in deposits on which it pays interest, and making loans from which it earns interest. Consequently, banks are always exposed to the changing macroeconomic landscape. More specifically, interest rates have a massive impact on financial results.
The current environment -- characterized by high interest rates, at least when compared to much of the last two decades -- has created a headwind for BofA. Loans and leases were up by less than 1% in the fourth quarter of 2023 on a year-over-year basis. And net charge-offs are up substantially.
But bullish shareholders are optimistic about the near term. The hope is that the Federal Reserve will start to reverse course and lower interest rates at some point in the not-too-distant future. And this could boost demand for all of the lending products Bank of America offers, which might lead to higher revenue and earnings.
The investing perspective
To be clear, investing in banks always presents risks that might not appear in other sectors of the economy. Besides cyclicality, there's simply just the complexity of the operations of a massive financial services organization like BofA. Unless you're an expert in analyzing bank stocks, like Buffett is, it's hard to understand fully how these companies operate.
That makes me want to avoid buying shares in Bank of America right now. However, I can totally see why other investors would still be compelled to add the stock to their portfolios. The company's previously mentioned competitive advantages, its durability, the potential for lower interest rates, and Buffett's stamp of approval are all encouraging signs.
Bank of America's valuation also looks reasonable. The stock trades at a price-to-book (P/B) ratio of just under 1.1 right now. That's in line with its trailing-10-year average. That's also slightly below Wells Fargo's P/B ratio of 1.2 and at a substantial discount to JPMorgan Chase's multiple of 1.9. If you believe in Bank of America and its long-term prospects, consider buying a few shares.
Should you invest $1,000 in Bank of America right now?
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JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Wells Fargo is an advertising partner of The Ascent, a Motley Fool company. Bank of America is an advertising partner of The Ascent, a Motley Fool company. Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple, Bank of America, Berkshire Hathaway, and JPMorgan Chase. The Motley Fool has a disclosure policy.
