Source: PaxForex Premium Analytics Portal, Fundamental Insight
CEO Warren Buffett and his company Berkshire Hathaway have long invested in bank shares. Out of the ten largest holdings in the Berkshire portfolio, four of them are banks. But as the coronavirus pandemic hit the economy and the banking sector was severely affected, Bank of America became a clear favorite of Buffett among his banking stocks, as well as among his portfolio holdings. Next, we will talk about what Bank of America means for Berkshire's portfolio.
Oracle from Omaha seems to have become a negative factor for banking stocks in the second quarter of the year, having liquidated its position in Goldman Sachs and significantly cut its positions in other major banks such as JPMorgan Chase and Wells Fargo. Banks are closely linked to the economy, so Buffet's steps may be linked to his belief that the economy will suffer over the next few years, which is not an unreasonable view.
But even though in the second quarter Buffett reduced a significant part of his banking holdings, he retained his position in Bank of America. Then, shortly after the second quarter, Berkshire invested more than $2 billion in the Bank of America over two weeks. Currently, the company owns almost 12% of the Bank of America's shares in circulation and has received Federal Reserve approval to purchase up to 24.9% of the bank's shares in circulation. It is certainly important because Buffett and Berkshire usually limit their purchases of banks to just under 10% of the shares outstanding to meet certain reporting regulations.
With more than 1.03 billion shares of Bank of America at an average price of $24.24 per share, Berkshire's total stake in Bank of America represents a market value of more than $25 billion. Berkshire is the second-largest shareholder in the Bank of America with a portfolio of more than $202 billion in shares. It means it accounts for more than 12% of the company's portfolio, second only to Apple, which accounts for almost 60% of Buffett's portfolio.
Berkshire's share portfolio of 202 billion dollars is only part of the balance sheet, which is approximately 788 billion dollars. The conglomerate also earns money from insurance, rail, utilities, and energy businesses, among other things. However, thanks to the new accounting rule in 2018, profits and losses from the Berkshire Hathaway share portfolio do indeed go through net profit. The company, however, has cautioned that it relies too much on the profits and losses from the share portfolio, as they are only on paper, reflecting changes in the market price of Berkshire shares, which can be extremely volatile, especially in the short term.
In the second quarter of 2020, Berkshire reported a profit of 26.4 billion dollars, which is more than 86% more than in the second quarter of 2019. However, in the first six months of the year, the management reported a loss of 23.4 billion dollars. This is because in the first quarter of the year the company reported a loss of almost $ 50 billion, most of which included a post-tax loss of $54.5 billion on investments, primarily due to the shares sell-off.
Most of this is likely related to the shares of the banks owned by Berkshire, as this year the sector has been hit hard by a significant level of expected future credit losses; low-interest rates, which will weigh on revenues; difficulties in analyzing banks; and economic uncertainty. From the beginning of the year to the end of the second quarter, net income from banking, insurance, and financial stocks owned by Berkshire fell from nearly $62 billion to approximately $28 billion. The fair value of these shares decreased from more than $102 billion to approximately $59 billion. Given that Bank of America's shares to date have plunged by about 33 percent and are the second-largest holding in the company's stock portfolio, it definitely played a big role in reducing net profits in 2020.
Despite the difficulties faced by the banking sector, Bank of America, according to analysts, performed relatively well given the circumstances. The bank's net profit for the first three quarters of the year was more than $12 billion, despite the addition of $11.3 billion to total reserves for future potential loan losses. With Bank of America trading below book value, the bank will have a greater and much more positive impact on future investor returns, despite the short-term challenges it faces now.
While the price is above 22.60, follow the recommendations below:
- Time frame: D1
- Recommendation: long position
- Entry point: 23.62
- Take Profit 1: 26.20
- Take Profit 2: 27.00
If the level 22.60 is broken-down, follow the recommendations below.
- Time frame: D1
- Recommendation: short position
- Entry point: 22.60
- Take Profit 1: 21.30
- Take Profit 2: 20.60