16 Oct

Berkshire Hathaway: Will Bank of America Be Like Apple?

WRITTEN BY Mohit Oberoi, CFA
  • Reportedly, Berkshire Hathaway applied for approval from the Fed to increase its stake in Bank of America. Based on second-quarter holdings, Apple is Berkshire Hathaway’s biggest holding followed by Bank of America.
  • Warren Buffett, Berkshire Hathaway’s chairman, gradually increased the stakes in Apple and Bank of America. While Buffett didn’t add any new Apple shares between the fourth quarter of 2018 and the second quarter of 2019, Berkshire Hathaway gradually added Bank of America shares.

Berkshire Hathaway’s application

Berkshire Hathaway (BRK-B) (BRK.B) has reportedly approached the Fed to increase its stake in Bank of America (BAC). According to Berkshire Hathaway’s 13F, it added more Bank of America shares in the second quarter. The company continued to add Bank of America shares in the third quarter. Generally, asset managers are required to report their holdings within 45 days of a quarter’s end. However, Berkshire Hathaway’s stake in Bank of America rose beyond 10%. As a result, the company had to report its stake before the third quarter 13F. Incidentally, the company has been gradually selling Wells Fargo shares (WFC) over the last few quarters in a bid to limit its stake below 10%. A stake above 10% generally leads to more regulatory screening.

Warren Buffett and Bank of America

Warren Buffett, Berkshire Hathaway’s chairman, invested in Bank of America in 2011. Since then, the company increased its stake in Bank of America. Berkshire Hathaway also exercised Bank of America warrants in 2017. The company faced troubles when it took a stake in Bank of America. The stock rose following the news that Buffett would be investing in the company. During 2007 and 2008, Buffett invested in companies like General Electric and Goldman Sachs that appeared to be in deep trouble. The General Electric (GE) investment wasn’t fruitful for Buffett. Since then, he exited the company. However, Berkshire Hathaway continues to hold Goldman Sachs.

Berkshire Hathaway and Apple

Currently, Apple (AAPL) is Berkshire Hathaway’s biggest holding. While the company holds around 5.5% of Apple, its stake is valued at around $59 billion. Berkshire Hathaway’s stake in Bank of America is around $28 billion based on current market prices. Notably, Buffett hasn’t invested in many technology companies over his more than five-decade investing career. Buffett sees Apple as a consumer company. Historically, Berkshire Hathaway’s portfolio has been overweight on consumer and financial sector companies. Buffett has looked comfortable with these two sectors.

Can Bank of America be the next Apple for Buffett?

Buffett invested in Apple in 2016. He gradually added more Apple shares until the third quarter of 2018. Since then, Buffett hasn’t added or sold any Apple shares. However, a different investment manager at Berkshire Hathaway sold some Apple shares in the fourth quarter of 2018. The move was a surprise. Apple stock fell in the fourth quarter of 2018. As Berkshire Hathaway’s filing with the Fed shows, the company looks comfortable. The company increased its stake in Bank of America beyond 10%. Previously, Buffett tried to limit stakes in banks like Wells Fargo below 10%.

Considering Berkshire Hathaway’s massive cash pile, it might add more Bank of America shares. The company is already Berkshire Hathaway’s second-largest holding. Can Bank of America overtake Apple in terms of stake value? We’ll have to wait and see. However, Buffett is known for large concentrated holdings.

Will the investment be fruitful?

Buffett has had his share of criticism. Recently, a longtime Berkshire Hathaway shareholder criticized him for holding too much cash. Buffett has looked optimistic about the banking sector. In the second quarter, he also added more J.P. Morgan shares. Given the current markets, it’s tough to build the case for investing in the banking space. We’re in a falling interest rate environment where the Fed and other central banks are willing to lower rates to spur growth. Typically, banks underperform in a lower interest rate environment. Global economic growth is slowing down. Some pundits even see a recession on the horizon. In such a scenario, the banking sector might come under pressure.

Long-term picture

Warren Buffett is a long-term investor. He isn’t concerned about short-term price movement. Looking at the long-term picture, the banking sector could face challenges from new-age fintech companies. Some investors see cryptocurrencies as a risk for the traditional banking system. In another series, we’ll explore whether doubling down on the banking sector really makes a compelling case for Buffett.

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