Berkshire Hathaway (BRK.A -0.28%) (BRK.B -0.68%) owns about 50 stocks in its portfolio, with a combined market value of around $338 billion as of this writing. Many of them -- especially the larger positions -- were hand-picked by CEO Warren Buffett himself. And there are several that look like compelling opportunities for patient long-term investors.
Just to name a few, Amazon (AMZN -1.64%) has been beaten down significantly despite recent data showing that consumer spending remains strong. General Motors (GM -0.04%) is still about 35% below its highs despite posting third-quarter earnings that came in well above expectations. And Ally Financial (ALLY 0.13%), a stock I recently bought, is trading for a fire-sale valuation after a relatively minor uptick in loan defaults.
Here's the Buffett stock I'm most excited about
While I own all three of the stocks mentioned above, as well as Berkshire Hathaway itself, I'm most excited about Bank of America (BAC -0.13%), Berkshire's second-largest investment and one that just reported strong third-quarter earnings.
Bank stocks have been beaten down in the recent market turmoil, and for a few reasons. For one thing, there's a fear that consumer spending will slow down due to inflation and economic uncertainty. And more importantly, many investors are worried about an uptick in loan defaults, especially if a recession were to hit.
However, Bank of America's recent results show that things are still going quite well. The bank surpassed expectations on both the top and bottom lines, and despite setting aside nearly $900 million for credit losses, it remained highly profitable. Loan balances grew by $114 billion year over year, a 12% increase, and the bank's deposit base grew by $20 billion.
Even the potential negatives don't look too bad. The bank reported that consumer spending remains very strong, with payment volume in 2022 so far up by 12% over 2021 levels, with higher spending year over year in all major categories.
On the loan delinquency topic, consumer savings remain above pre-pandemic levels. And while we're seeing past-due balances creep upward a little, delinquencies remain well below where they were before the pandemic, so there isn't a major cause for alarm just yet.
A beneficiary of higher rates
One reason investors should be excited about Bank of America is that it is likely to be one of the biggest beneficiaries of rising interest rates. As benchmark interest rates rise, so do the rates banks charge for loans. However, interest rates paid on deposits don't rise nearly as fast, especially in Bank of America's case. The bank has a high proportion of deposits that don't pay interest, and it pays an average of just 0.02% on consumer deposits.
We're seeing this in the numbers. In the third quarter, net interest income increased by 24% year over year. And this could be just the beginning. Bank of America says that a 100-basis-point shift in rates would produce another $4.2 billion in annual net interest income, and the consensus calls for at least another 175 basis points (1.75%) of Federal Reserve interest-rate hikes.
A great value for long-term investors
In a nutshell, Bank of America's stock has been beaten down due to some legitimate fears, but there is a lot more to the story. Consumer spending remains strong, loan delinquencies are at a manageable level, and the bank stands to make billions in additional profit if rates keep rising.
While the near term could be quite a roller coaster as economic headwinds play out, this megabank is looking like a bargain for long-term investors after this year's underperformance.
