Warren Buffett keeps selling stocks. The Oracle of Omaha has been a net seller of equities for his company's portfolio in each of the last six quarters, as reported by Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B) . The odds are good he'll make it seven in a row when Berkshire reports next month, and now he's going for eight with another major stock sale.
A recent filing with the U.S. Securities and Exchange Commission ( SEC ) revealed that Buffett sold $1.5 billion of Berkshire Hathaway's second-largest equity holding, Bank of America (NYSE: BAC) . The sale represents just a 3.3% reduction in Berkshire's stake in the bank but could be just the start.
There's no doubt Bank of America has been a very successful investment for Buffett and Berkshire Hathaway shareholders. And Buffett is famously quoted as saying his favorite investment holding period is "forever." So why is he selling shares now?
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Taking the money out of the bank
There are a few reasons Buffett might have sold Bank of America stock.
After the stock's strong performance over the last eight months, shares are currently trading at levels unseen since the start of 2022. Despite the strong financial and operational performance underlying that price appreciation, Buffett may believe the shares are now fully valued, so he's taking money off the table as a result.
Another reason may have less to do with the current valuation and more to do with locking in gains at a favorable tax rate. Buffett's cost basis on those Bank of America shares is just over $14, on average. That means over two-thirds of the proceeds from Buffett's sales are taxable gains.
Buffett hasn't been shy about taking gains on some of his favorite stocks lately. He sold billions worth of Apple (NASDAQ: AAPL) shares in the fourth and first quarters.
When asked why he sold Apple shares at the annual shareholder meeting in May, Buffett explained that he was happy to pay taxes at the current favorable tax rate of 21%. He expects the rate will increase in the future. However, he said he expects Apple to remain Berkshire Hathaway's largest equity holding for some time.
The same factors may have led him to take the tax hit on Bank of America shares now. That may suggest Buffett still likes the business and the stock but doesn't see it growing as quickly as it has in the recent past -- at least not enough to justify paying higher taxes on the gains later.
Should you buy or sell Bank of America stock?
Bank of America saw its shares fall in price as interest rates climbed. That's because the bank has high exposure to longer-duration bonds, which currently carry low interest rates. As a result, the bank missed out on opportunities to buy securities with higher coupons as interest rates climbed.
Bank of America's decision to invest in longer-duration bonds has an outsized effect on a metric called net interest income (NII). That's the difference between the revenue generated by the bank's interest-bearing assets and the expense it pays on interest-bearing liabilities. Since the bank holds long-term bonds but has to pay market rates, NII declined as interest rates increased.
But management says NII has hit its trough. It's forecasting growth in the third and fourth quarters this year, reaching $14.5 billion in the fourth quarter.
The good news is Bank of America is poised to do well, relative to its peers if the Fed cuts interest rates (as it is expected to later this year). The knife cuts both ways, so to speak.
With a price-to-book value of 1.25, Bank of America's shares look fairly priced. Buffett's sale appears to be more about taxes than anything specific about the company or its stock.
Bank of America is an advertising partner of The Ascent, a Motley Fool company. Adam Levy has positions in Apple. The Motley Fool has positions in and recommends Apple, Bank of America, and Berkshire Hathaway. The Motley Fool has a disclosure policy .
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