Stock market investors looked prepared for major indexes to open flat to slightly lower on Wall Street Tuesday morning. Many eyes are on Washington, where negotiations to raise the debt ceiling remain contentious and tense. That's causing consternation among investors who want more certainty in an already difficult macroeconomic environment.
Despite the choppy market action, investors remain interested in what some of their favorite investing gurus are doing. Warren Buffett has been the object of attention for millions of investors for decades, and the latest release of holdings of his Berkshire Hathaway (BRK.A -0.83%) (BRK.B -0.81%) included purchases of a pair of bank stocks. Below, you'll learn more about why Buffett might have chosen Capital One Financial (COF -2.35%) and Bank of America (BAC -1.75%) as his favorite banks right now.
Capital One becomes a Buffett stock
Shares of Capital One Financial were up more than 6% in premarket trading on Tuesday morning. Berkshire Hathaway's 13-F filing with the U.S. Securities and Exchange Commission revealed that the insurance giant had taken an initial position in the bank of 9.92 million shares, worth roughly $954 million at recent prices. That represents a stake of about 2.6% in Capital One, although it only represents about 0.3% of the money that Buffett has committed to individual publicly traded stocks within Berkshire's corporate empire.
Throughout most of its history, Capital One has gotten most of its business from its credit card operations. Many investors have been increasingly leery about credit card exposure recently, as worsening economic conditions threaten to put more pressure on consumers. Thus far, increases in delinquency rates have been minimal, but many banks have started to boost their provisions for credit-related losses as interest rates have risen and personal budgets have shown signs of getting strained.
However, Capital One has shown foresight in aiming to build up its deposit base. Unlike larger banks with an established consumer banking franchise, Capital One hasn't been able to attract and retain much in the way of non-interest-bearing deposits. However, it has successfully kept its interest costs well below the federal funds rate and also under what many of its closest peers are paying right now.
Buffett has always been optimistic about the U.S. economy, so buying a financial stock with cyclical exposure at a time when others are nervous about Capital One is completely consistent with his philosophy.
Buffett adds to BofA
In contrast to Capital One, Bank of America was already a big position in Berkshire's portfolio. Yet that didn't stop Buffett from making a big buy, adding 22.75 million shares to bring Berkshire's total holdings to around 1.03 billion shares worth $29.5 billion. That represents 9% of Berkshire's portfolio of publicly traded stocks and gives Buffett a 12.9% stake in BofA. It also came as little surprise to investors, so shares inched higher by just a fraction of a percent.
Bank failures earlier in 2023 had their most significant impact on smaller regional banks. That's understandable, given the size of the banks that failed and the types of exposure that they had. Yet shares of larger banks weren't completely immune from worries about the financial system, and Bank of America's stock dropped 17% in the month of March as the regional banking crisis played out.
Yet some believe that BofA is more likely to benefit from the industry's challenges than get hurt by them. With ample access to low-cost deposits, BofA hasn't been as apt as smaller banks to see customers flee. Indeed, fewer customers worry about BofA failing than a small bank, so that could send more deposits into the banking giant's coffers.
Meanwhile, investors get a dividend that yields 3.2% right now. Buffett loves dividend income, and so seeing an incremental bump in Berkshire's BofA position looks entirely in line with the Oracle of Omaha's long-term playbook.
