There are many different types of investors on Wall Street, but the CEO of Berkshire Hathaway (BRK.A -0.39%) (BRK.B -0.56%) is in a class of his own. Since taking the helm at the holding company, he's delivered a 4,615,876% return. That's roughly twice as much as investors would have earned by investing in the benchmark S&P 500 index.
You don't need to be a Wall Street insider to know which stocks Buffett and Berkshire Hathaway are investing in. Every three months, the Securities and Exchange Commission makes everyone who manages assets totaling over $100 million disclose trading activity.
Berkshire Hathaway ended September with 40 different holdings and a large cash position. The Oracle of Omaha isn't afraid to concentrate on a handful of his favorite businesses. The third largest holding, Bank of America (BAC -0.47%), is worth about $31.7 billion, or 12% of Berkshire's equity portfolio.
Before you rush out to buy Bank of America stock, you should know that Buffett trimmed his position in the third quarter by more than 235 million shares. Let's weigh some reasons to buy the stock against challenges the bank is facing to see if it's a smart buy now.
Reasons to buy Bank of America stock
Bank of America has greatly benefited from a higher-interest-rate environment and a well-respected brand. The federal funds rate rose sharply in 2022, and heaps of smaller competitors raised the interest rates they offer customers accordingly. Bank of America still offers its huge customer base an interest rate of 0.04% or less on savings deposits.
Much of Bank of America's basic savings deposit base flowed into higher-yielding CDs and retirement accounts, but very little flowed to competitors. It reported total deposits worth $1.9 trillion at the end of September.
Effective Federal Funds Rate data by YCharts.
Thanks to higher rates and strong deposit retention, profit has soared. Net interest income, or the difference between interest paid, and interest received has risen about 30% over the past three years to $55.7 billion over the trailing-12-month period.
Bank of America stock has risen about 36% in 2024, but it still looks inexpensive. It's been trading for 14.1 times forward earnings expectations while the average stock in the Dow Jones Industrial Average trades at 22.6 times forward earnings estimates.
Reason to avoid Bank of America
In 2022, when interest rates started rising, Bank of America was holding a lot of long-term Treasuries and other investments that pay a very low fixed interest rate. The price of any fixed-income security falls as interest rates rise. As a result, it's sitting on $89 billion in unrealized security losses.
Investors don't have to worry about seeing Bank of America report a heavy loss, as it intends to hold those securities to maturity. With $1.9 trillion in deposits, it's extremely unlikely the bank will need to sell those securities at a loss.
Bank of America's net interest income gain over the past few years hasn't been anything to complain about, but it could have been much better. Anticipating higher rates, JPMorgan Chase (JPM -0.81%) passed up opportunities to invest in early 2022 by hoarding cash.
BAC Net Interest Income (TTM) data by YCharts.
JPMorgan's slightly risky decision to avoid long-term Treasuries in favor of cash paid off in spades. Net interest income soared a whopping 78% over the past three years to $93.3 billion.
A buy now?
Before deciding about whether to buy Bank of America stock, it's important to understand what's important to you. If you're interested in steady, reliable gains of the sort that Buffett enjoys, it could be a smart buy now.
Shares of Bank of America offer a meager 2.3% dividend yield at recent prices, but it could produce a heap of passive income by the time you retire. The company's raised its payout by 44% over the past five years. It might not be a top performer, but the odds of losing money over the long run seem low.
