Will This Company Soon Be Warren Buffett's Biggest Holding?

Believe it or not, Bank of America (NYSE: BAC  ) could soon become the single largest holding of Warren Buffett's Berkshire Hathaway (NYSE: BRK-A  ) . Shocking, I know, but the math is really quite simple.

Two and a half years ago, Buffett invested $5 billion in Bank of America. In exchange, Berkshire received a corresponding amount of preferred stock that pays a 6% dividend, and warrants to buy 700 million shares of the bank's common stock at an exercise price of $7.14 per share. The warrants expire in September of 2021.

At today's price of roughly $17.90, Berkshire has already more than doubled its initial investment -- and that excludes the preferred stake. The common-stock position has been so lucrative, in fact, that it's become, in effect, Berkshire's fifth largest equity holding.

So, here's the question: What will it take for Bank of America to supplant Wells Fargo (NYSE: WFC  ) at the top of Berkshire Hathaway's portfolio? And the answer is: Not as much as you might think.

Berkshire currently owns a little over 490 million shares of Wells Fargo valued at approximately $24 billion. Meanwhile, Berkshire's combined stake in Bank of America is worth a little more than $17.5 billion -- $5 billion for the preferred stock and $12.5 billion for the current value of the warrants.

Because the value of the preferred stake is essentially fixed, this means that the value of Berkshire's warrants will have to appreciate by around $6.5 billion. While that sounds like a lot, it isn't a considerable as you might think.

For this to happen, Bank of America's shares would need to increase by about $9.30 each. To be clear, that's no small accomplishment given that they've already climbed by 80% over the last two years. Additionally, there's every reason to believe that Wells Fargo's shares will continue to appreciate as well.

But Wells Fargo's stock trades for 1.62 times book value while the multiple on Bank of America's stock is 0.84 times book. To become Berkshire's largest holding, in turn, all Bank of America would need to do is close this gap by a little more than half.

Is that possible? Absolutely.

Once Bank of America puts the remainder of its financial crisis liabilities behind it (which could happen this year), it isn't unreasonable to think that the market will value its shares at more than one times book. And from there, it's only a hop, skip, and a jump to the 1.3 multiple that Bank of America needs to become, at least by holding size, Buffett's favorite bank.

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  • Report this Comment On March 21, 2014, at 5:11 AM, Interventizio wrote:

    Good reasoning.

  • Report this Comment On March 23, 2014, at 3:34 PM, truthwillsaveus wrote:

    BAC stuck my daughter with silly charges on her savings account. Told her to close her account. WFC mistakenly charged me $80 fee at the closing of our house which they would not refund. The big banks are a cancer in this country and these 2 are as bad as they get. They all can't wait to have a feeding frenzy if Fannie and Freddie go away. The Fool seems to support this and doesn't support Fannie and Freddie when their demise could be very damaging indeed.

  • Report this Comment On March 23, 2014, at 5:57 PM, jaybird43 wrote:

    Agree with Truthwill saveus. Going to a Bank of America for any reason is an adventure, and a long one at that. They never have enough people at ANY windows at ANY location. At WFC they have managers in corner offices who won't talk to anyone. What good are these people? In fact, what good are either of these banks? Neither is lending either.

  • Report this Comment On March 24, 2014, at 11:14 AM, radiyojo wrote:

    My wife started us with a credit union years ago. The service is incredible. We have no plans to leave. I setup our kids with Schwab Bank when they left for college. Schwab pays all anytime teller fees at no charge. Schwab is a great option too especially if you want one stop investing for the whole family.

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John Maxfield

John is The Motley Fool's senior banking specialist. If you're interested in banking and/or finance, you should follow him on Twitter.

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Related Tickers

9/3/2015 4:01 PM
BAC $15.94 Up +0.09 +0.57%
Bank of America CAPS Rating: ****
BRK-A $199665.00 Up +305.00 +0.15%
Berkshire Hathaway… CAPS Rating: ****
WFC $52.43 Up +0.44 +0.85%
Wells Fargo CAPS Rating: *****