Earlier this week, I decided to sell my investment in Bank of America (NYSE:BAC). It’s one of the largest investments Warren Buffett owns in the Berkshire Hathaway stock portfolio.
Despite this, I figured there was a better opportunity available. And the stock I’ve been buying just so happens to be another Berkshire investment.
Why sell?
First things first – I can’t see anything wrong with Bank of America shares. But with the stock up 42% since October, I don’t think they offer the same value they once did.
Buffett also pointed out a significant risk with the stock at the last Berkshire Hathaway meeting. Concerns over US banking regulation caused him to sell shares in JP Morgan and other banks.
I held my shares a bit longer, since I thought there were still attractive returns on offer. A 3.6% dividend plus share buybacks averaging 2.6% a year looked attractive to me.
A higher share price changes things somewhat – the dividend yield comes down and share buybacks have less effect. That’s why I decided to sell the stock to buy something else.
What to buy?
I’ve been adding to my stake in Kraft Heinz (NASDAQ:KHC) with some of the cash I generated from the BofA sale. The stock is down 10% over the last 12 months and I think I see an opportunity.
My investment thesis for the company has been the same for a while. I’m not expecting significant revenue growth from the business, but I think it can improve profitability by reducing its debt.
So far, that thesis seems to be playing out. Back in November, the firm announced it had met its balance sheet targets and was therefore going to spend $3bn on share buybacks by the end of 2026.
At today’s prices, that’s about a 7% return – or 2.4% a year. By itself, that’s not eye-catching, but adding it to a dividend currently yielding 4.6% makes for a more interesting proposition.
Looking for opportunities
Investing, as Buffett notes, isn’t about predicting what share prices will do. It’s about working out how much cash a business is likely to be able to pay out over time.
It’s not so long since I thought I could get a 6.2% return from BoA. But at today’s prices, I think I have a better chance of achieving this kind of return with Kraft Heinz.
The biggest threat to my thesis is a resurgance in inflation. That would be a nuisance for a number of reasons, but in this context it would be bad for the company’s margins.
Kraft Heinz is investing heavily into its brands though. They’re its main defence against increasing costs and I think these will prove a valuable asset over time.
Buffett stocks
I’m a big fan of the Berkshire CEO and I’m always interested in what the company has been selling. But I always make sure I have my own investment thesis.
By itself, the fact that someone else bought (or sold) a stock isn’t a good enough reason for me to do the same. While I’m buying and selling Buffett stocks, I’m making sure I stick to my own ideas.
