Robinhood traders are well-known for their love of high-growth stocks, particularly in the technology sector, but that's not all they buy. Investors on the popular app-based stock trading platform also own many value stocks. A quick glance at the 100 most popular stocks among Robinhood investors reveals four different stocks that are also components of Berkshire Hathaway's (BRK.A 0.55%) (BRK.B 0.49%) portfolio -- most of which were hand-picked by legendary value investor Warren Buffett.
Of these four stocks, the one Buffett has shown the most confidence in is Bank of America (BAC 0.50%). In fact, while Berkshire has pared down other major bank investments such as JPMorgan Chase and Wells Fargo -- which are also popular Robinhood stocks -- it has spent over $2 billion in 2020 adding to its massive Bank of America stake.
Berkshire now owns nearly 12% of Bank of America, and thousands of Robinhood traders have added it to their portfolios, as well. Should you join them?
Buffett's Bank of America investment
As far as bank stocks go, Bank of America is a relatively recent addition to Berkshire's portfolio. Buffett invested in Bank of America preferred stock (similar to buying bonds) in the wake of the financial crisis and received warrants to buy 700 million shares of the bank's common stock. But these weren't exercised until 2017. So unlike Wells Fargo and several other bank stocks in Berkshire's portfolio, Bank of America has only been an official "Buffett stock" for just over three years.
Since then, Buffett has added considerably to the investment, including about $2 billion spread over several purchases in 2020. Now, Berkshire owns more than 1 billion shares of the bank, a stake worth about $25 billion. Only Apple is a larger component of Berkshire's portfolio.
What's interesting is that, at the same time Berkshire has been building its Bank of America stake, it's been selling many other bank stocks. Buffett and his team have unloaded billions worth of Wells Fargo, JPMorgan Chase, Goldman Sachs, U.S. Bancorp, Bank of New York Mellon, and several others. In short, it's fair to say that Bank of America has rapidly become Warren Buffett's favorite big bank stock.
It's also worth mentioning that Buffett isn't the only big investor who has a large position in the bank. Bank of America is a top-10 holding of no less than 30 hedge funds.
Why does Buffett like Bank of America so much?
Buffett is generally tight-lipped about his reasons for liking any particular stock, and we don't know the exact reasons why Buffett has added to his Bank of America investment while reducing other bank exposure. But here are a few of the probable reasons we know:
- Management: We know for a fact that Buffett is a fan of Bank of America CEO Brian Moynihan, who has done a tremendous job of improving asset quality, efficiency, and profitability in the years since the financial crisis. It's tough to overstate how much value Buffett places on good management, and Bank of America certainly has it.
- Improvements: Bank of America has gone from one of the least efficient and least profitable big banks to one of the best. Prior to the COVID-19 pandemic, Bank of America was posting returns on equity and assets that would have seemed unthinkable just a few years ago.
- Noninterest-bearing deposits: One interesting thing to note is that Bank of America has a relatively high concentration of deposits that don't pay interest, as compared to some of its rivals. This means that when interest rates rise, Bank of America makes more from lending but doesn't have as big of an increase in interest expense on the deposit side. In short, when rates eventually rise, Bank of America is likely to be one of the biggest beneficiaries.
- Valuation: While Buffett's first priority is to invest in great businesses, he's still a value investor, so it's likely that Bank of America's valuation is attractive to him. As of this writing, the company trades for about 12% less than its book value, despite all of its improvements and the fact that the bank is highly profitable.
Should you buy Bank of America?
First off, it's not a great idea to buy any stock just because a billionaire owns it, even if that billionaire is named Warren Buffett. Having said that, there's quite a lot to like about Bank of America, especially while it's trading at such a steep discount. It's no wonder it's so popular among billionaires and Robinhood traders alike.