Why Buffett's Favorite Stock Is Leading the Dow Today

Blue-chip stocks are down today as investors and analysts weigh good news from the domestic housing sector against the ongoing economic drama in the Mediterranean. With roughly an hour remaining in the trading session, the Dow Jones Industrial Average (DJINDICES: ^DJI  ) is off by 26 points, or 0.18%.

The biggest news since the weekend is that the Mediterranean nation of Cyprus is on the verge of levying a tax against bank deposits. On Sunday the country added its name to a growing list of European countries bailed out by the Eurozone and the International Monetary Fund. To fulfill its side of the 10 billion euro bailout bargain, however, Cyprus must come up with 5.8 billion euros in new revenue. And for this, it's looking to its banking sector, long known as a haven for international riches -- particularly of the Russian variety. The fear is that other countries will follow suit, thereby prompting funds to flee the continent.

On the other side of the equation, fueling bullish sentiments today was a positive report on the domestic housing market. According to data released this morning by the Department of Commerce, housing starts climbed 0.8% last month to an annualized pace of 917,000. Economists surveyed by Bloomberg had projected a figure of 915,000. Meanwhile, building permits rose by 4.6% to a rate of 946,000 -- the highest level since June of 2008. This beat economists' expectations for a 925,000 figure.

"Home building continues to recover and add to the recovery," an economist at PNC Financial told Reuters. He went on to note that the rise in permits suggests that "we will have a solid spring." A California-based homebuilder echoed this confidence in an interview with Bloomberg, saying: "We see a lot of positive signs out there. All the numbers were positives going into the year, and again, we have a favorable outlook for the year."

With the latter news in mind, it's no surprise that stocks of homebuilders are rallying today. Among others, Hovnanian Enterprises (NYSE: HOV  ) is up by 3%, Toll Brothers has gained 0.7%, and KB Home is up 1.9%. But as my colleague Dan Caplinger said earlier of Hovnanian: "At some point the homebuilder will need to start working its way back to profitability amid better conditions. Otherwise, investors will conclude that the stock has gotten ahead of itself, and it will give up some of its huge recent gains."

In terms of Dow stocks, the best-performing component on the blue-chip index today is none other than Warren Buffett's favorite: Coca-Cola (NYSE: KO  ) , in which his company Berkshire Hathaway holds a nearly 9% stake. Paradoxically, the impetus for Coke's climb may be Cyprus. As one of the soundest and most stable companies in the world -- Buffett famously claims that even a monkey could run it -- Coke is seen as a classic defensive stock. When things are bad, in turn, investors have a tendency to move in its direction. And as Fool Dan Dzombak observed this morning, it doesn't hurt that the soft-drink maker pays a generous 2.9% yield.

Close on Coke's heels are shares of Bank of America (NYSE: BAC  ) , the nation's second-largest bank by assets. Although most of its competitors are down today -- including fellow Dow bank JPMorgan Chase -- B of A is still riding high after its performance in last week's Federal Reserve-administered Comprehensive Capital Analysis and Review, or CCAR. Following a solid showing in the stress tests the week before, the Fed's CCAR cleared the way for the bank to repurchase $5 billion in common stock and $5.5 billion more in preferred shares. As I've discussed, this has analysts cooing about the possibility of a further 20% climb in B of A's stock.

After Bank of America's stock doubled in 2012, is it possible that there's more yet to come? With significant challenges still ahead, it's critical to have a solid understanding of this megabank before adding it to your portfolio. In The Motley Fool's premium research report on B of A, analyst Anand Chokkavelu, CFA, and Financials bureau chief Matt Koppenheffer lift the veil on the bank's operations, detailing three reasons to buy and three reasons to sell. Click here now to claim your copy.


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