Berkshire Hathaway (NYSE: BRK.A) has been selling Bank of America (NYSE: BAC) and capping gains in 2024. The firm sold about $2 billion from early September through October, extending a trend that began in the spring. The selling trimmed the firm's holding of BAC to under 10% of the stock, which is the real problem. At that level, Berkshire is not required to report additional sales in a “timely” manner and is likely to continue selling. Should the stock price rise, Berkshire selling more Bank of America is virtually guaranteed.
Berkshire Caps Gains in Bank of America Stock
Berkshire Hathaway sales helped to cap gains in BAC stock in July and confirmed the critical resistance level on the day of the Q3 earnings release. The firm made one of its largest sales that day and followed it up with another two days later.
Among the details from Q2 is Bank of America’s robust buyback figures, which Mr. Buffet usually likes. Bank of America repurchased $3.5 billion of shares in Q3, reducing the average count by 2.9% for the quarter. Because of results, including cash flow and balance sheet strength, buybacks are expected to continue robustly.
Ironically, Bank of America’s buybacks are a problem for the market today because Berkshire has set a threshold. Bank of America stock buybacks will push the Berkshire stake above 10%, forcing it to report more timely: investors should expect Berkshire sales to match company buybacks on a dollar-for-dollar basis at the very least. Because Mr. Buffet has expressed concerns about the stability of the financial system and the stickiness of deposits, Berkshire may keep selling to exit a less-than-ideal investment.
Bank of America Institutional Activity Takes a Turn for the Worse
The analysts' sentiment supports the market, and the revision trend leads it to new highs. After the Q3 earnings release, the analysts' activity included numerous reaffirmed ratings and price target increases that amount to a Moderate Buy with a 5% to 10% upside. The upside potential may increase due to a sustained positive revision trend as the quarter's progress and capital returns flow. Still, there is more risk in institutional activity than Berkshire Hathaway. The analysts may be leading the market to slaughter.
Simultaneous with Berkshire Hathaway selling Bank of America, institutional activity also turned bearish. Institutions bought on balance in Q1 and Q2, but the balance turned to selling in Q3, which was sustained in the first two weeks of Q4. This is a significant headwind because the institutions own 70% of the stock and may be expected to continue selling, given the potential influx of Berkshire-owned shares to the market. The price action in BAC may move higher intraday, but a sustained uptrend is unlikely to occur in this situation.
Consumer Credit Is Healthy But Trending in the Wrong Direction
Among the risks for Bank of America’s business and the banking sector in general is consumer credit quality. Consumers continue to use more credit, driving lending activity up by 11%, but quality is deteriorating. While delinquency and charge-offs remain below the 2019 comparable periods, delinquencies rose by 175 basis points YoY and charge-offs by 41. Delinquencies are now only 11 basis points below the 2019 comp and charge-offs less, both likely to worsen before they get better. The FOMC has cut interest rates, but it takes several quarters for consumers to feel the impact, and the cutting pace will likely be slow.
Bank of America stock shows a top at $43. That top coincides with Berkshire Hathaway’s selling and is compounded by the shift in institutional activity. Assuming the institutions (with or without Berkshire Hathaway’s help) continue to sell on balance, it is unlikely that the BAC market will be able to move higher or sustain the move if it does. The odds are high that the market will retreat to retest support near the $38 level or lower in that scenario.
