If you're thinking about making some of Warren Buffett's stock picks for your own investment portfolio, you wouldn't be wrong -- he's not called the Oracle of Omaha for nothing. Over the course of the past several decades, his Berkshire Hathaway portfolio regularly outperforms the S&P 500 on a yearly basis. His approach to selecting stocks works well for him.
But Buffett has quite a bit more resources to invest with and can make several picks to help improve his odds of success. Your available investment capital is likely more limited. If you've only got room in your portfolio for one of Buffett's picks, Bank of America (BAC -0.21%) is your best bet right now.
Lackluster BofA performance ... right now
If you keep tabs on the banking sector, then you likely know BofA hasn't exactly been a star performer of late. Shares of the big bank are down 27% year to date, underperforming the already poorly performing broad market. Brewing economic weakness paired with (and stemming from) rising interest rates are the key culprits of the setback.
It's this very sell-off, however, that makes Bank of America such an exciting prospect right now. The bulk of any economic headwinds BofA is seeing is arguably already priced in, leaving far more upside than continued downside on the horizon.
Yes, last quarter's results were less than thrilling. Total revenue was up a tad, but per-share earnings slipped from $0.85 in the third quarter of 2021 to only $0.81 this time around, despite a bigger loan portfolio and net asset growth. Noninterest expenses as well as provisions for loan losses were both up year over year for most of the bank's operating segments. Earnings estimates of $0.84 per share for the current quarter are also a paltry increase from last year's fourth-quarter profits of $0.82.
However, it's possible and even likely that these lackluster quarters represent the worst of any challenge due.
BofA investors need to look forward, not backward
This idea doesn't necessarily jibe with recent headlines. Rival banks like Wells Fargo, JPMorgan Chase, and even Bank of America itself recently joined a chorus of other banks cautioning that at least a mild recession is a distinct possibility early next year. That weakness could correspond with another round of selling for stocks.
Some stocks are predictive rather than reactive, however. In other words, some stocks trade with respect to their foreseeable future rather than their recent past. Said yet another way, Bank of America shares may well start to recover before the economy clearly does, if investors start anticipating the company's eventual, inevitable rekindling of growth.
We've certainly seen this before. Although it didn't happen during the (very anomalous) short-lived recessionary period seen in early 2020 due to the global spread of COVID-19, BofA shares were on the mend before the effect of 2008's subprime mortgage meltdown had fully run its course. And Bank of America stock was flying high in 2001, even before the recession prompted by the dot-com crash actually began. We saw similar action in 1990.
Read between the lines. Many stocks -- and bank stocks in particular -- trade in a very forward-looking manner.
And Warren Buffett would certainly support investors willing to think and act along these lines. The 92-year-old investing veteran suggested more than once to "be fearful when others are greedy, and be greedy when others are fearful." There's a lesser-circulated Buffett-ism, however, that cuts straight to the same point: "The best chance to deploy capital is when things are going down."
Things are certainly down right now.
Rekindled growth is in the cards for BofA
The advice, of course, assumes the capital being deployed is being used to purchase a quality stock ... which BofA is. The company's top and bottom lines are running into a headwind here, and the stock's peeling back accordingly. But it's done the same plenty of times in the past only to bounce back bigger and better than ever. Again, take a look at the long-term chart of shares above. Weak patches have consistently been fantastic entry opportunities.
But is this time different? Or could this time be worse? Maybe. But that's not likely. Even with CEO Brian Moynihan's efforts to keep expectations in check, current consensus earnings and revenue estimates are still more bullish than not.
Data source: Thomson Reuters. Chart by author.
This isn't an unbelievable outlook, either. While even a slight recession poses problems for lenders and capital markets middlemen like Bank of America, rising interest rates work in banks' favor.
Assuming nothing else was set to change in the meantime, Moynihan commented in September that recently raised interest rates could translate into more than a billion dollars worth of additional income in 2023 than the company would have likely produced without the recent streak of rate hikes. And that was before the two most recent rate increases of 75 basis points each.
For perspective, Bank of America earned a little over $20 billion in net income through the first three quarters of the year.
Don't make the bigger picture more complicated than necessary
Bottom line? As always, think bigger picture. The headlines and backdrop may look and feel a bit grim here, but economic soft patches aren't a new phenomenon. Bank of America can push past it, and if history is any indication, it will likely do so with flying colors.
The stock's a bargain in the meantime. Shares are modestly priced at less than 9 times the company's expected 2023 profits, and the dividend yield currently stands at an attractive 2.7%.
Don't make buying this Buffett holding more complicated than it needs to be.
