Berkshire Hathaway (BRK.A -0.76%) (BRK.B -0.69%) Chairman and CEO Warren Buffett and his team own about 47 stocks in the holding company's portfolio, along with one exchange-traded fund (ETF). Out of the vast universe of investable stocks, it's these 48 that managed to catch the eye of one of the world's greatest investors. That's saying something. 

Bank of America (BAC -0.21%) is not only one of those 48 holdings; it is the second-largest position in its entire portfolio. Buffett's Berkshire owns more than 1 billion shares of Bank of America, the nation's second-largest bank, for a total market value of about $29.5 billion. Those shares account for 9.1% of the Berkshire Hathaway portfolio, and only Apple accounts for a bigger share of the portfolio.

That indication of high interest in the stock should get the attention of investors. When you consider that Bank of America is trading near its lowest valuation in years, the flashing "buy" sign glows even brighter.

Let's take a look at why this Warren Buffett favorite is a stock you should buy on the dip.

Buffett buying low

Bank of America was one of the few bank stocks that Buffett added positions to in the first quarter, buying another 22.8 million shares worth about $615 million. At the same time, he reduced positions in other bank stocks or sold them off entirely, as Berkshire did with US Bancorp and Bank of New York Mellon. 

The run on deposits for select banks in the first quarter, which eventually led to the collapse of three banks, rattled the markets and required federal government intervention to prevent further damage. It apparently rattled Buffett too, who has long been a fan of banks.

"It would have been catastrophic," Buffett said at Berkshire Hathaway's annual shareholder's meeting in May if the government had not guaranteed the failed banks' deposits. The result would have been widespread bank runs, he added.

But the one bank he did single out at the meeting was Bank of America.

"We're very cautious ... about ownership of banks and we do remain with one bank ... I like Bank of America and I like the management," Buffett said at the Berkshire shareholder meeting in Omaha.

There are some very good reasons why Buffett, and investors in general, should like Bank of America right now, starting with its low valuation.

Valuation near a 10-year low

The turmoil in the banking industry that culminated with the failure of two major banks in March, and a third in April, reverberated throughout the market. The KBW Nasdaq Regional Banking Index plummeted about 34% from the beginning of March through the end of April. It is down roughly 24% year to date. The KBW Nasdaq Bank Index, which tracks the 24 largest U.S. banks, was down about 31% over that same stretch, and year to date it has plunged about 22% as of June 29.

As a result of the sell-off, valuations tanked across the board, with Bank of America being no exception. Its stock price is down about 13% year to date, trading at around $28 per share. Its valuation metrics also plummeted, as its price-to-earnings (P/E) ratio is at 8.4 as of June 29, which, aside from when it briefly dipped to 8 in March 2020 at the start of the pandemic, is the lowest it has been since 2012.

Also, its price-to-book (P/B) ratio fell to 0.80, which is the lowest it has been since the start of the pandemic. A P/B ratio below 1 means that its price is below its book value per share, and suggests it is trading at a significant discount.

While there are concerns, as Buffett expressed, about the banking industry, given the uncertain economy and the potential for more regulations, among others, Bank of America has weathered the storm better than most. One reason is because the turmoil resulted in a flight to safety, as many customers at smaller, regional banks opened accounts at large banks. Bank of America and JPMorgan Chase were the most favored recipients as they both saw a surge in deposits after the bank failures.

In fact, Bank of America had a strong quarter with loan balances up 7% year over year, net interest income up 25% to $14.4 billion, and revenue climbing 13% to $26.3 billion. Overall, net income rose 15% year over year to $8.2 billion, or $0.94 per diluted share.

So, its financials are strong, and it should benefit in a continued flight to safety, particularly as the economy improves. Some mid-year economic outlooks call for more economic growth in 2023 than anticipated and the likelihood that the U.S. will avoid recession. With interest rates still high, a potential reduction in deposit pressures, and an improving forecast for investment banking, Bank of America is in a prime position to grow.

Investors may want to take a page from the Buffett playbook and buy the dip on this stock.