Ok, so I would argue that there is a million things that Warren Buffett knows about the stock market that we (ok, I) don’t, he is a much smarter man that I’ve ever claimed to be (and I’ve never claimed to be a man).
But it was interesting to see that last week Buffett invested 5 billion dollars into Bank of America. Why did he do it and what does this mean? Does that mean the banks are a good investment opportunity? Does it mean the recession will soon be over? Should we be investing in Bank of America as well?
Since there has only been speculation so far over why he invested in Bank of America, although whichever way you look at it you would have to agree that it is a good sign for the economy because Warren Buffett doesn’t do charity and every decision he makes is a sound financial business one, I thought I’d take it back to simple fundamentals again and have a look at why he might have invested in it.
Here are Bank of America’s (BAC) main fundamentals (the one’s I think are most important).
ROE is -6.74%
Qtly Earnings Growth is -35.6%
And over the past twelve months has decreased by 38.61%
So on paper this does not look like a very good investment right now. But Warren Buffett is a smart man. He knows how to run a business and run it profitability. He has turned around bad businesses before and made them thrive as we’ve seen numerous times.
From the fundamentals we can see that right now BAC has terrible management effectiveness. The banks are simply running their business very poorly (duh!) and have been for some time. So far no surprises since the banks have been blamed for the economic recession we are in (with good reason although not entirely ONLY their fault).
But Buffett has been buying into the financials for some time now. Last month he purchased Wells Fargo and purchased it at a much higher stock price than he did with Bank of America. So let’s have a quick look at Wells Fargo’s (WFC) fundamentals:
Earnings Growth 28.9%
And increased stock price by 2.46% over the past 12 months
On paper Wells Fargo makes a much better investment option. It has much stronger fundamentals and has already proven to have a good management in place.
It’s clear that Buffett is very interested in the financial sector right now, and if you wanted to copy the big man then that’s where I’d be putting my money too however I would not be investing in Bank of America just yet. And here is why:
Buffett only invested $5 billion in BAC which for his company is not a huge investment (yes it sounds like a MASSIVE amount to us, but for his business it only represents a position of less than 2.5% of what BAC’s market cap is).
He got preferred stock, not common stock which is what we would get if we bought into it. He gets a 6% yield with his stock, common stockholders get less than 1% yield.
He understands that if he wants to increase the value of the financial market then he needs to take a stake across the board, not just in one or two companies.
He has been buying more of Wells Fargo (and seems more positive about it) for some time. Wells Fargo has much stronger fundamentals and makes a much better investment for everyday Americans.
If you want to follow Buffett’s lead then I think you’d do much better buying into Wells Fargo right now rather than Bank of America. They are likely to make a much better return for investors over the next twelve months and beyond. Especially now that the big man is a player.
Go for it rockstars.