Because of his illustrious track record, average investors often look to Warren Buffett for potential stock ideas. Berkshire Hathaway's huge $369 billion portfolio has many businesses among its holdings to choose from.
Bank of America (BAC -0.21%) is Berkshire's second-largest position, with the Oracle of Omaha's conglomerate owning a 13.1% stake in the important financial institution. Despite this vote of confidence, the bank stock has only increased by 14% in the last five years (as of Feb. 13). And its shares have fallen 26% since the start of 2022, while the S&P 500 is up.
Perhaps there are better days on the horizon. At least that's what bullish investors are hoping for. Does this mean now is the right time to buy Bank of America stock?
Latest financials are mixed
Bank of America, the country's second-biggest bank by assets, reported mixed results for the fourth quarter of 2023. Revenue of $22 billion was down 10% year over year, missing Wall Street estimates. However, adjusted diluted earnings per share, which came in at $0.70, exceeded expectations. These headline figures point to the uncertain economic environment.
On the bright side, BofA registered solid customer growth. It added 130,000 new checking account clients in the quarter, with a 7% jump in active mobile banking users. On the negative side, net interest income was down 5% year over year in Q4 2023. The business is finally having to pay higher rates on its deposit balances to discourage customers from fleeing to higher-yield products from competitors.
Additionally, Bank of America's credit card portfolio reported a loss rate of 3.07%, a figure that climbed quarter over quarter. The company's net charge-offs of $1.2 billion were nearly double the year-ago period. BofA set aside $1.4 billion as a provision for credit losses, preparing for difficult times ahead.
BofA has competitive advantages
Investors looking to buy and hold stocks for the long haul should focus on identifying companies that possess competitive advantages. This is especially pertinent given how crowded the banking industry is.
Bank of America is able to stand out because it's a trusted brand, with a successful history that spans over a century. This helps it gain the confidence of consumers that newer fintech upstarts might not have.
The strong brand recognition, coupled with Bank of America's scale and wide reach, benefits the business because it helps draw in massive amounts of deposits. As of Dec. 31, the company had more than $1.9 trillion of deposits on its balance sheet. Not only are these low-cost, but they are typically very sticky.
The rates Bank of America pays on its deposits still pale in comparison to other options available on the market. The fact that there hasn't been a huge exodus demonstrates the switching costs large banks have, as customers are less likely to leave to competing service providers.
BofA's valuation is reasonable
The recent financials might not be anything to write home about, but the current price-to-earnings ratio of 10.7, which is cheaper than peers like JPMorgan Chase and Citigroup, looks like a decent entry point. Prospective shareholders will also benefit from a healthy 2.9% dividend yield that can boost returns.
However, before investors rush to buy this bank stock, it's best to understand the cyclical nature of the company's operations. BofA, like its counterparts, will certainly be challenged in an economic downturn. There's still the possibility that we enter a recession in the near term, so bullish investors should size their positions accordingly if they want to own shares.
I don't deny the dominance and durability of Bank of America. However, I'm not a huge fan of businesses that depend heavily on robust external factors for their success. So, even though shares look reasonably valued, I'll happily pass on the stock today.
