Warren Buffett’s Berkshire Hathaway has sold about $10 billion of Bank of America shares since early summer, a move described in a sell-rating report posted yesterday on Seeking Alpha as a likely effort to generate cash before a possible bear market.
An analysis of the Charlotte-based bank’s price to trailing sales ratio and other technical indicators highlights “a rare sell signal, suggesting material downside risk, especially in a recession scenario,” private investor and speculator Paul Franke wrote on Seeking Alpha, an online financial research site.
Citing “limited upside potential matched against the substantial risk of loss,” Franke said he’s maintaining his sell rating on Bank of America for the next 12 months.
The second-biggest U.S. bank plans to release its third-quarter earnings report Tuesday, Oct. 15. For now, it’s benefiting from what Franke described as “a kind of best-of-all-worlds banking situation, with high borrowing rates for loan originations on one hand and limited loan default stats on the other.’’
Bank of America’s “consumer and small business loan focus looks like a winner when times are good,” he said. “Operating problems appear in a recession, as credit quality issues and loan write-offs explode.”
Noting that Bank of America shares have declined in six of the last seven recessions, Franke said that “over the past 16 years, shares have eked out an annualized advance of just +1.7%. You would have earned a greater sum plainly by owning CDs issued by Bank of America.”
The stock is trading around $40, down more than 10% from its 52-week high of $44.44. If the shares are to trade above $40 next year, the ‘Goldilocks’ economy of 2024 must continue, according to Franke.
“We need to see inflation and interest rates backpedal some more,” he said. In addition, the U.S. economy can’t slow from its real GDP growth rate of 2% or more, while confidence in the U.S. equity market “must remain abnormally exuberant,” based on capital flows and sentiment surveys, he said.
“If any of these three pillars for a sound economy with a boom in stocks reverses, BAC’s share price will likely suffer,” Franke said. If the economy sinks into “a mild recession,” the stock may tumble before $30 and under $20 with “a major drop in economic activity crossed with rising inflation.”
Franke said he believes that’s “the risk side of the investment equation Berkshire managers like Buffett seem to be focused on.
“In my view, upside potential is sorely lacking in the stock if earnings are peaking in 2024,” he said. “When times are good and have been for a stretch of years, selling banks and financials can seem nonsensical. Yet, Warren Buffett is doing so (having liquidated much of his bank/financial holdings during 2023-24) because the industry is quite cyclical in nature.”
