Bank of America“Warren Buffet Invests in Bank of America stock” announced CNBC last night.  This came at a time when Bank of America stock had been beat up back down to the $6 range on mounting concerns that the company’s Countrywide acquisition with poorly written mortgages would need to raise more capital quickly.  This would have meant a secondary offering of the stock when it was in single digits, flooding the market with more shares.  The the Oracle of Omaha came riding into Charlotte wearing all white.  He spoke directly with CEO Brian Moynihan this week saying how he thought the company was undervalued and how it could use a momentum swing.  When you are the most prolific investor of all time, you tend to swing momentum on a dime, when you announce you are investing in a company that has been crushed in the short term.  This is exactly what happened, with buyers flooding into the stock on a down day adding nearly 10% to the stock price.  Wow, Buffet already made money!  Of course, Buffet is getting a great deal.  He is getting a 6% dividend on his $5 billion investment as well as a ton of warrants to buy a ton more stock at the $7 range at any time.  This will add another couple billion to the overall deal when things are all said and done.  They say warrants act like a sweetener, and that is exactly what this did.

The 2008 Bank of America

Now Buffet is not a rookie at investing in undervalued financial assets.  In the downturn of 2008, Buffet made similar deals with General Electric and Goldman Sachs near their stock price bottoms.  Buffet made a ton on these investments in the last couple years.  Both Goldman Sachs and GE had to pay a 10% premium interest payment on the preferred stock as well as getting a ton of warrants that Buffet is still holding, and he is already in the black on those deals.  The man knows how to make money, and when you are Warren Buffet it makes it easier to negotiate a favorable deal.  Needless to say this Warren Buffet Investment in Bank of America will not be the last time he does this.  He has made billions on investing in distressed assets that are undervalued.

Because of this injection, I think we are close to the bottom of this second financial fiasco.  If you can get Bank of America under $8.50 I think it is a buy.  However, now that Buffet has already dipped his toe in, I think the two financials to get into are JP Morgan and Goldman Sachs.  GS is trading close to that $100 level with JP Morgan trading at $35.  I can see a quick and easy 30% upside when these names bounce back.  I am even as crazy as to say we could see a 30% upside by the end of the year in these 3 names.  This investment by Buffet has raised the floor in these financial stock prices.  He might not be calling the exact bottom, but we know he has made a ton of money in the past doing this so because of that, I feel the bottom is close.  No one can give a psychological boost to a company’s stock price like Warren Buffet, and that is exactly what he just did with Bank of America.

Good Luck!

Cheers,

Vinny

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