Now that Warren Buffett’s reign in Berkshire Hathaway (NYSE: BRKA)(NYSE: BRKB) has ended after more than six decades, attention has focused on 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 like Visa (NYSE: V), MasterCard (NYSE: MA), Amazonand UnitedHealth Group between them. However, one thing that remained was his great participation in bank of america (NYSE: BAC)a stock he first bought in 2011. As of March 31, Bank of America represents 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 held strong amid one of the largest portfolio rebalancing events, here are some takeaways for long-term investors.
More value can now be found in traditional banks
Berkshire’s decision to exit its positions in Visa and Mastercard while maintaining its position in Bank of America is notable because it signals how the company views traditional money center banks versus more premium, fintech-leaning companies. At the time of writing, Visa and Mastercard are trading at 25.1 and 25.4 times their projected earnings for the next 12 months, respectively. Bank of America is trading at 11.6.
Admittedly, comparing Bank of America’s valuations to those of Visa and Mastercard is not a perfect apples-to-apples comparison because the latter operate asset-light “tolling” transaction models, but there is a notable 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 do the same?
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 investment goals or needs. The fact that Berkshire sells Visa and Mastercard but sticks with Bank of America is not an indictment of Visa or Mastercard (I’m a fan of Visa stock). Both companies have a competitive moat that Buffett has always preached about.
However, the main takeaway for long-term investors is the value Berkshire sees in a reasonably priced traditional bank that provides long-term stability and above-average income (its current dividend yield is around 2.1%). Valuations are not always the most important factor when investing in a stock, but they are worth considering because high valuations can limit a stock’s upside potential.