Warren Buffett sold shares of Bank of America. Here’s why you can still buy it.

Warren Buffett’s company Berkshire Hathaway has built one of the largest and most successful equity portfolios in the world. It is now worth more than $300 billion. It’s a great endorsement to be in Berkshire’s portfolio. But it may also attract unwanted attention if Buffett and Berkshire start selling a stock.

This is the position Bank of America (BAC -0.34%) it came after the conglomerate unloaded more than $7.2 billion in stock over the past two months. While Buffett and his team of investors at Berkshire are some of the best in the world, I think long-term investors can still buy Bank of America stock. Here’s why.

Why is Buffett selling?

Honestly, I don’t know. And the public is unlikely to ever really know why Buffett and Berkshire are selling. But it’s important to understand that people who own a $300 billion stock portfolio and hedge fund portfolio managers have very different mindsets than retail investors. The “smart money” is owed to shareholders, and a 5% move in a stock’s share price one way or another can have far greater consequences for them than for an individual investor.

I also think it’s important to understand that Berkshire is not selling these shares at a loss. I calculate an average price of all sales over the past two months at just under $41. If you look at many of the purchases Berkshire has made since 2017, they’re in the $20-$20 range. We also know that in 2011 Berkshire received warrants equivalent to 700 million shares of common stock at an exercise price of $7.14. These warrants were converted in 2017, so Berkshire could make massive profits on those as well.

Finally, I think two other things are worth noting. One is that Berkshire still has a sizeable position in Bank of America, which represents more than 10% of its portfolio and is the third largest position in its portfolio. Berkshire and Buffett could also be bracing for either an economic slowdown or a stock market decline. Berkshire has loaded nearly $235 billion of short-term Treasuries. It is more than what is held at the Federal Reserve. Banks are cyclical, so Buffett may see this as an opportune time to reduce some of his holdings.

The upper part

Although shares of Bank of America are up about 35% over the past year, there are plenty of reasons why it will continue to rise. One is purely mechanical. Because of bad balance sheet management, Bank of America loaded up on low-yield bonds before interest rates started rising two years ago, and many of those bonds are now underwater. At the end of the second quarter, the bank had a securities portfolio of more than $850 billion, with a blended yield of less than 3 percent.

As the securities exit the portfolio, the bank can reinvest them in higher yielding assets. On the company’s second-quarter earnings call, management said about $10 billion of securities roll over each quarter, which can be reinvested 300 basis points higher. In addition, as a result of unrealized paper losses on securities, cash flow hedges and other financial instruments, Bank of America has unrealized losses of approximately $17.6 billion.

These unrealized losses diminish the tangible equity, and therefore the tangible book value, that banks trade on. Assuming those unrealized losses are recouped over time, that’s still about $2.25 of tangible book value based on the number of common shares outstanding at the end of Q2 2024. That should boost Bank of America’s stock value.

The other thing that Bank of America and many banks have going for them is the slope of the yield curve. After about two years, there is no longer an inverted yield curve where shorter-dated T-bills yield more than longer-dated ones. Although many believe that banks perform better in a higher interest rate environment, this is not entirely true. Banks also need a steep yield curve because banks tend to borrow short-term and lend long-term.

A steep yield curve will translate into net interest income (NII), one of the main sources of income at Bank of America. The NII looks at the difference between what banks make on their interest-earning assets, such as loans, and what they pay for their interest-bearing liabilities, such as deposits. According to Visible Alpha, analysts believe Bank of America’s NII has tilted. Consensus estimates expect the bank to generate $56.6 billion of NII this year (fully taxable equivalent basis) and then $59.5 billion in 2025.

Bank of America is a buy

It’s always important to look at what the big guys are doing and use their moves to guide or re-evaluate your thesis on individual actions. However, you should always remember that institutional investors have a different mindset than retail investors and you should not follow every move blindly. With Bank of America poised to recover lost tangible book value and NII’s upward trajectory, I think long-term investors can still buy the stock despite Berkshire selling some of its stake.