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

While Wells Fargo has long been considered Warren Buffett's favorite stock, it may soon cede its position to Bank of America.

Mar 20, 2014 at 5:07PM


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.

How you can make billions like Buffett
Through the years, Buffett has offered up investing tips to shareholders of Berkshire Hathaway. Now you can tap into the best of Warren Buffett's wisdom in a new special report from The Motley Fool. Click here now for a free copy of this invaluable report.

John Maxfield owns shares of Bank of America. The Motley Fool recommends Bank of America and Wells Fargo. The Motley Fool owns shares of Bank of America and Wells Fargo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.


Compare Brokers