Billionaire Warren Buffett Sold 26% of Berkshire's Stake in Bank of America and Is Piling Into a Financial Juggernaut That's Soared 33,000% Since Its IPO

There's arguably not a money manager on Wall Street who commands the attention of investors quite like Berkshire Hathaway's (NYSE: BRK.A)(NYSE: BRK.B) billionaire CEO, Warren Buffett. Although other billionaire money managers might outpace Buffett's annual return from time to time, the greater than 5,500,000% cumulative return the Oracle of Omaha has overseen in his company's Class A shares (BRK.A) since taking over as CEO in the mid-1960s speaks for itself.

Given Buffett's long-term success, it's not uncommon for investors to want to mirror his trading activity. Thanks to Form 13F filings with the Securities and Exchange Commission (SEC), this can be done with relative ease. A 13F is a required filing for institutional investors with at least $100 million in assets under management that provides a snapshot of which stocks these top-tier money managers purchased and sold in the latest quarter.

Berkshire Hathaway CEO Warren Buffett. Image source: The Motley Fool.

Based on select SEC filings and Berkshire's operating cash flow statements, we know that Buffett and his team have been net sellers of stocks for the last two years. This selling activity has been particularly pronounced among his company's top investment holdings, including money-center colossus Bank of America (NYSE: BAC).

The Oracle of Omaha has dumped more than 266 million shares of BofA

Although 13Fs are typically where investors get their juiciest information on trades made by Wall Street's smartest and most-successful asset managers, Form 4 filings can come in just as handy. When Berkshire holds a greater than 10% stake in a public company, it's required to file a Form 4 with the SEC disclosing share acquisitions and dispositions within two business days of a transaction.

Since July 17, Buffett's company has disclosed 16 separate Form 4 filings concerning Bank of America. Over that time, the Oracle of Omaha has overseen the sale of 266,546,544 shares of BofA stock, equating to about 26% of the stake Berkshire had held, as of the end of June.

The all-important question is: Why would Warren Buffett jettison over $10 billion worth of his favorite bank stock?

One possible (benign) catalyst for this selling activity is tax implications. During Berkshire Hathaway's annual shareholder meeting in early May, Buffett suggested that the corporate tax rate would climb in the coming years. Therefore, locking in sizable unrealized gains now in key holdings, such as Apple, should, in hindsight, be viewed as a smart move by Berkshire's shareholders. While BofA wasn't mentioned when Buffett discussed his forecast for corporate taxation, Berkshire has been sitting on a meaningful unrealized gain from its No 3 holding.

The worry for investors is that Buffett's aggressive selling of Bank of America stock has to do with much more than just taxes.

For instance, the stock market is at one of its priciest valuations in history! On Oct. 25, the S&P 500's Shiller price-to-earnings (P/E) ratio (also known as the cyclically adjusted P/E ratio, or CAPE ratio) closed at approximately 37, which is more than double its average reading of 17.17 since January 1871. This also represents the third-highest reading during a continuous bull market dating back more than 150 years. Stocks aren't cheap, which may be encouraging Buffett and his team to pare down some of their largest positions and raise cash.

BofA isn't the screaming value it once was, either. When the Oracle of Omaha initially invested $5 billion into Bank of America in August 2011 via preferred stock, the company's shares were valued at a 62% discount to its book value. Today, BofA's shares trade at an 18% premium to book value. While this is still reasonably cheap, Bank of America no longer screams "value."

Furthermore, Bank of America is the most interest-sensitive of America's biggest banks by total assets. The steepest rate-hiking cycle by the nation's central bank since the early 1980s has added billions of dollars in net interest income to BofA's bottom line each quarter. But with the Federal Reserve shifting to a rate-easing cycle, Buffett and his team may be anticipating interest income weakness to come.

Finding stocks to buy in the financial sector has been a challenge for Buffett... with one exception.

Image source: Getty Images.

The Oracle of Omaha can't stop buying shares of a high-flying financial leader

Though Warren Buffett has been a very selective buyer for two years, there is one stock he's spent even more money purchasing over the last year than his favorite stock, Berkshire Hathaway. I'm talking about market-leading property & casualty insurer Chubb (NYSE: CB).

On rare occasion, Buffett will request confidential treatment for one or more securities, which keeps these securities from being listed in Berkshire Hathaway's quarterly 13Fs. Being granted confidential treatment by regulators allows Buffett and his top investment advisors to build sizable stakes in public companies at a lower cost basis. When investors find out which stock(s) Buffet and his team have been buying, it's not uncommon for them to pile in and drive up the share price.

Between July 1, 2023 and March 30, 2024, Berkshire Hathaway was granted confidential treatment for its position in Chubb. On May 15, Berkshire's 13F spilled the beans on this position, which stands at north of 27 million shares, as of June 30, and is currently worth about $7.8 billion.

Since Chubb's initial public offering (IPO) in 1984, shares of the company have skyrocketed by 33,000%, inclusive of dividends.

The lure of top-tier insurance stocks like Chubb is the predictability of their cash flow and their premium pricing power. Catastrophe losses and adverse events are inevitable, which affords insurers the ability to raise premiums after these events, as well as during periods of lower-than-expected claims.

To add to the above, some of Chubb's insurance products are geared toward high-earning clientele. For instance, its homeowner insurance solutions are prominently focused on high-value homes. The advantage of targeting high-income clientele is that their spending habits, including their ability to pay their bills, doesn't change much, if at all, during minor economic downturns.

Don't overlook the positive role that higher Treasury yields have played for Chubb, either. Insurance companies almost always invest their float, which is the portion of premium collected that isn't disbursed as a claim, in ultra-safe, short-term Treasury bills. Even with the Fed kicking off a rate-easing cycle, short-term T-bill yields are considerably higher than where they were three years ago. This means more interest income for Chubb.

Lastly, Warren Buffett is a huge fan of robust capital-return programs. In May, Chubb's board increased the company's base annual payout for a 31st consecutive year. Further, Chubb has been consistently buying back its common stock since the start of 2017, which has reduced its outstanding share count by 13.6%. Spending billions of dollars on buybacks is lifting Chubb's earnings per share (EPS) and incrementally increasing the ownership stakes of existing shareholders, like Berkshire Hathaway.

Should you invest $1,000 in Bank of America right now?

Before you buy stock in Bank of America, consider this:

The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Bank of America wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.

Consider when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you’d have $861,121!*

Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than quadrupled the return of S&P 500 since 2002*.

See the 10 stocks »

*Stock Advisor returns as of October 28, 2024

Bank of America is an advertising partner of The Ascent, a Motley Fool company. Sean Williams has positions in Bank of America. The Motley Fool has positions in and recommends Apple, Bank of America, and Berkshire Hathaway. The Motley Fool has a disclosure policy.