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Berkshire (BRK.B) Trims BAC Stake: What Should Investors Know?
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Warren Buffett’s Berkshire Hathaway Inc. (BRK.B - Free Report) has again cut its stake in Bank of America (BAC - Free Report) . The Oracle of Omaha offloaded nearly 14 million shares in three consecutive trading sessions. Berkshire now holds 928.5 million shares or about 12% stake in Bank of America.
Despite the trimmed stake, BAC remains the third largest holding of Berkshire, with Apple (AAPL - Free Report) occupying the top position (nearly 29% stake) followed by American Express (AXP - Free Report) (a little more than 12% stake).
Shares of Berkshire Hathaway have gained 27.2% year to date, outperforming the industry’s 26.2% growth, the Finance sector’s rise of 13.6% and the S&P 500 composite’s rise of 18.2%.
Berkshire Outperforms Industry, Sector & S&P YTD
Image Source: Zacks Investment Research
What Made Berkshire Trim Stake?
A cut in interest rate in September seems likely. The interest rate is currently at 5.5-5.5%, a 23-year high. As per a report published in CNBC, “Inflation has declined significantly. The labor market is no longer overheated, and conditions are now less tight than those that prevailed before the pandemic,” Powell said. “Supply constraints have normalized. And the balance of the risks to our two mandates has changed.” This reinforces the chances of at least a quarter percentage point rate cut in September and raises the odds of a potential half-point reduction to about 1-in-3, according to CME Group’s FedWatch.
Bank of America, being a direct beneficiary of an improved rate environment, experienced a significant improvement in net interest income. After 11 rate hikes from March 2022 through July 2023, a rate cut will no doubt hit the net interest income though a lower rate will drive net interest margin expansion.
BRK.B Trading Above 50-Day Moving Average
Berkshire shares are trading well above the 50-day moving average, indicating a bullish trend. Shares are trading near the high end of its 52-week range.
BRK.B Price Movement vs 50-Day Moving Average
Image Source: Zacks Investment Research
Buffett’s Intelligent Investments
Berkshire Hathaway is a conglomerate with more than 90 subsidiaries engaged in diverse business activities. Its property and casualty insurance business, one of the largest property and casualty insurance companies, generates the maximum return on equity. The company also benefits from diverse earnings streams, including utilities and energy, and manufacturing, service and retail.
With a huge cash hoard, Berkshire Hathaway acquires entities or adds stakes of companies that have consistent earning power and generate impressive returns on equity or add. While big acquisitions open up more business opportunities for the company, bolt-on acquisitions enhance the earnings of the existing business.
Warren Buffett has always eyed acquisitions or made investments in properties that are undervalued and have potential for growth. Investments in Coca-Cola and American Express show the investment acumen of Warren Buffet and Charlie Munger. Berkshire Hathaway also has stakes in behemoths like Apple, Bank of America, Chevron and Occidental Petroleum.
However, Buffett never shies away from offloading stocks or stakes if he does not find them fit for his investment basket. Getting rid of Snowflake (SNOW) is an example of the same. This provider of a cloud-based data platform has been incurring losses for several quarters and seems nowhere near reaching profitability soon. Also, shares of SNOW have lost 54.4% since it went public in 2020.
Expensive Valuation
The stock is overvalued compared to its industry. It is currently trading at a price-to-book multiple of 1.61, higher than the industry average of 1.59. However, we believe that given Berkshire Hathaway's dominant market presence, diverse business activities, and, above all, the name Warren Buffett, a premium valuation is quite justified for this Zacks Rank #3 (Hold) stock. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Image Source: Zacks Investment Research
Berkshire’s Return on Capital
Return on equity in the trailing 12 months was 7.4%, underperforming the industry average of 8%. Return on equity, a profitability measure, reflects how effectively a company is utilizing its shareholders. It's noteworthy that though BRK.B’s ROE is lagging behind the industry average, the company successfully improved the same.
Image Source: Zacks Investment Research
Its return on invested capital (ROIC) has increased every year since 2020. This reflects BRK.B’s efficiency in utilizing funds to generate income. However, ROIC in the trailing 12 months was 5.8%, lower than the industry average of 6.1%.
Image Source: Zacks Investment Research
Optimistic Analyst Sentiment
Two of the three analysts covering the stock have raised estimates for 2024 and 2025 over the past 30 days. The Zacks Consensus Estimate for 2024 implies a 14.4% year-over-year increase, while the same for 2025 suggests a 1.3% increase. The consensus estimate for 2024 and 2025 has moved 4.3% and 2.4% north respectively in the last 30 days.
Image Source: Zacks Investment Research
To Sum Up
Holding shares of Berkshire Hathaway renders dynamism to shareholders’ portfolios. It gives a feel of investing in mutual funds. But above all, the company has Warren Buffett at its helm, who has been creating tremendous value for shareholders over nearly six decades with his unique skills.
Thus, investors who already hold Berkshire shares should continue to retain the stock in their portfolio as it is unlikely to disappoint investors.
However, given its premium valuation, new investors can wait for a better entry point.
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Berkshire (BRK.B) Trims BAC Stake: What Should Investors Know?
Warren Buffett’s Berkshire Hathaway Inc. (BRK.B - Free Report) has again cut its stake in Bank of America (BAC - Free Report) . The Oracle of Omaha offloaded nearly 14 million shares in three consecutive trading sessions. Berkshire now holds 928.5 million shares or about 12% stake in Bank of America.
Despite the trimmed stake, BAC remains the third largest holding of Berkshire, with Apple (AAPL - Free Report) occupying the top position (nearly 29% stake) followed by American Express (AXP - Free Report) (a little more than 12% stake).
Shares of Berkshire Hathaway have gained 27.2% year to date, outperforming the industry’s 26.2% growth, the Finance sector’s rise of 13.6% and the S&P 500 composite’s rise of 18.2%.
Berkshire Outperforms Industry, Sector & S&P YTD
Image Source: Zacks Investment Research
What Made Berkshire Trim Stake?
A cut in interest rate in September seems likely. The interest rate is currently at 5.5-5.5%, a 23-year high. As per a report published in CNBC, “Inflation has declined significantly. The labor market is no longer overheated, and conditions are now less tight than those that prevailed before the pandemic,” Powell said. “Supply constraints have normalized. And the balance of the risks to our two mandates has changed.” This reinforces the chances of at least a quarter percentage point rate cut in September and raises the odds of a potential half-point reduction to about 1-in-3, according to CME Group’s FedWatch.
Bank of America, being a direct beneficiary of an improved rate environment, experienced a significant improvement in net interest income. After 11 rate hikes from March 2022 through July 2023, a rate cut will no doubt hit the net interest income though a lower rate will drive net interest margin expansion.
BRK.B Trading Above 50-Day Moving Average
Berkshire shares are trading well above the 50-day moving average, indicating a bullish trend. Shares are trading near the high end of its 52-week range.
BRK.B Price Movement vs 50-Day Moving Average
Image Source: Zacks Investment Research
Buffett’s Intelligent Investments
Berkshire Hathaway is a conglomerate with more than 90 subsidiaries engaged in diverse business activities. Its property and casualty insurance business, one of the largest property and casualty insurance companies, generates the maximum return on equity. The company also benefits from diverse earnings streams, including utilities and energy, and manufacturing, service and retail.
With a huge cash hoard, Berkshire Hathaway acquires entities or adds stakes of companies that have consistent earning power and generate impressive returns on equity or add. While big acquisitions open up more business opportunities for the company, bolt-on acquisitions enhance the earnings of the existing business.
Warren Buffett has always eyed acquisitions or made investments in properties that are undervalued and have potential for growth. Investments in Coca-Cola and American Express show the investment acumen of Warren Buffet and Charlie Munger. Berkshire Hathaway also has stakes in behemoths like Apple, Bank of America, Chevron and Occidental Petroleum.
However, Buffett never shies away from offloading stocks or stakes if he does not find them fit for his investment basket. Getting rid of Snowflake (SNOW) is an example of the same. This provider of a cloud-based data platform has been incurring losses for several quarters and seems nowhere near reaching profitability soon. Also, shares of SNOW have lost 54.4% since it went public in 2020.
Expensive Valuation
The stock is overvalued compared to its industry. It is currently trading at a price-to-book multiple of 1.61, higher than the industry average of 1.59. However, we believe that given Berkshire Hathaway's dominant market presence, diverse business activities, and, above all, the name Warren Buffett, a premium valuation is quite justified for this Zacks Rank #3 (Hold) stock. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Image Source: Zacks Investment Research
Berkshire’s Return on Capital
Return on equity in the trailing 12 months was 7.4%, underperforming the industry average of 8%. Return on equity, a profitability measure, reflects how effectively a company is utilizing its shareholders. It's noteworthy that though BRK.B’s ROE is lagging behind the industry average, the company successfully improved the same.
Image Source: Zacks Investment Research
Its return on invested capital (ROIC) has increased every year since 2020. This reflects BRK.B’s efficiency in utilizing funds to generate income. However, ROIC in the trailing 12 months was 5.8%, lower than the industry average of 6.1%.
Image Source: Zacks Investment Research
Optimistic Analyst Sentiment
Two of the three analysts covering the stock have raised estimates for 2024 and 2025 over the past 30 days. The Zacks Consensus Estimate for 2024 implies a 14.4% year-over-year increase, while the same for 2025 suggests a 1.3% increase. The consensus estimate for 2024 and 2025 has moved 4.3% and 2.4% north respectively in the last 30 days.
Image Source: Zacks Investment Research
To Sum Up
Holding shares of Berkshire Hathaway renders dynamism to shareholders’ portfolios. It gives a feel of investing in mutual funds. But above all, the company has Warren Buffett at its helm, who has been creating tremendous value for shareholders over nearly six decades with his unique skills.
Thus, investors who already hold Berkshire shares should continue to retain the stock in their portfolio as it is unlikely to disappoint investors.
However, given its premium valuation, new investors can wait for a better entry point.