Now that Warren Buffett’s reign at Berkshire Hathaway (NYSE: BRKA)(NYSE: BRKB) has ended after more than six decades, attention has turned to its new CEO, Greg Abel, and how his strategies may differ from Buffett’s.
Since Buffett’s departure, Berkshire has made notable moves, including exiting 16 positions in the first quarter, with giants such as Visa (NYSE: V), Mastercard (NYSE: MA), Amazon, and UnitedHealth Group among them. However, one thing that remained was its large stake in Bank of America (NYSE: BAC), a stock it first bought in 2011. As of March 31, Bank of America accounts for 8% of Berkshire Hathaway’s stock portfolio (its fourth-largest holding).
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Considering how long Bank of America has been one of Berkshire’s largest holdings and how it has stood firm amid one of the portfolio’s largest rebalancing events, here are some takeaways for long-term investors.
There’s more value to be found in traditional banks right now
Berkshire’s decision to exit its Visa and Mastercard positions while keeping its Bank of America position is notable because it signals how the company views traditional money-center banks versus more premium fintech-leaning companies. At the time of this writing, Visa and Mastercard are trading at 25.1 and 25.4 times their projected earnings over the next 12 months, respectively. Bank of America is trading at 11.6.
Admittedly, comparing the valuations of Bank of America to those of Visa and Mastercard isn’t a perfect apples-to-apples comparison because the latter operate asset-light “toll booth” transaction models, but there is a noticeable gap in valuations between the two types of financial stocks. It’s clear which way Berkshire is leaning based on its recent moves (and non-moves).
Should the average investor follow suit?
It’s important to remember that the average investor and a trillion-dollar company with hundreds of billions in cash ($397.4 billion as of March 31) don’t always have the same investing goals or needs. Berkshire’s selling Visa and Mastercard but sticking to Bank of America isn’t an indictment on Visa or Mastercard (I’m a fan of Visa’s stock). Both companies have a competitive moat that Buffett has always preached about.
However, the main takeaway here for long-term investors is the value Berkshire sees in a fairly priced traditional bank that provides long-term stability and above-average income (its current dividend yield is around 2.1%). Valuations aren’t always the most important factor when investing in a stock, but they’re worth considering because high valuations can cap a stock’s upside.
