There are currently only two bank stocks inside the top 100 most popular stocks traded on the online brokerage platform Robinhood. This should not come as a surprise, as banks are not exactly flashy like the tech industry and therefore do not command the same attention from retail traders. Honestly, I am surprised that there are any bank stocks inside Robinhood's 100 most popular stocks. Let's take a look at what these two lucky banks are, why they are popular among retail traders, and if they are good investments.
1. Bank of America
Bank of America (BAC 3.35%) is the second-largest bank in the U.S. with more than $2.8 trillion in assets at the end of 2020. The bank likely has one person to thank for its popularity among retail traders: Warren Buffett.
The legendary investor and CEO of Berkshire Hathaway (BRK.A 1.18%) (BRK.B 1.30%) is followed closely by the entire investing community, from hedge funds to Robinhood traders. Last summer, Berkshire pumped more than $2 billion into Bank of America's stock over 12 consecutive trading days. That increased Berkshire's position in the company to nearly 12% of outstanding shares, making it the second-largest position in the company's equity portfolio behind Apple.
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Furthermore, Berkshire has received approval from the Federal Reserve to purchase up to 24.9% of Bank of America's outstanding shares. That's certainly significant because Buffett and Berkshire usually limit their bank positions to below 10% of outstanding shares to avoid certain reporting requirements. Bank of America is also the one bank Berkshire has increased its position in over the last year -- the company has been trimming and eliminating a lot of its other bank positions, so it's a big testament to how Buffett views Bank of America.
The stock recently traded at levels not seen since the Great Recession, but could have more tailwinds this year, including eventual loan growth, lower amounts of loan losses than previously expected, and the ability to buy back lots of stock.
2. Square
Square (SQ -2.28%) has long been popular among retail traders, but it's seen as more of a financial technology company than a formal bank. However, Square obtained a formal bank charter last year and recently launched Square Financial Services, an in-house bank for businesses.
While it may sound boring, the bank charter will do a lot for Square as it looks to continue its mission of making it easier for businesses to run their operations.
The charter will help Square by improving its loan operations and also enable the company to offer deposit products such as checking and savings accounts. Without a bank charter, companies cannot hold deposits on their balance sheets. Square had already been making loans to its customers, but because it was not a bank, it had to work with another industrial bank partner to originate the loans. The company also funded a lot of its loans by having institutional third-party investors purchase the loans on a forward-flow basis.
With the bank charter in hand, making loans to its customers will be easier and more profitable because Square can use cheaper deposits to fund them. And with millions of small businesses using Square, the company already has a huge customer base to offer its banking services to, making the company a lot more attractive with a formal bank charter.
