Warren Buffett Sells Bank of America and Buys a Monster Stock Up 1,700% Since 2011

Key Points

• Warren Buffett's Berkshire Hathaway sold shares of Bank of America and added shares of Domino's Pizza in the first quarter.

• Bank of America is the second largest U.S. bank as measured by domestic deposits, so interest rate cuts will be a headwind.

• Domino's Pizza, the largest pizza company in the world, has consistently outperformed its peers in same-store sales growth.

• 10 stocks we like better than Bank of America ›

Warren Buffett has one of the most impressive track records on Wall Street. His patient and value-oriented investment philosophy turned Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B) from a small textile mill into a trillion-dollar company. The stock has returned 20% annually since he took control six decades ago.

Consequently, some investors make a habit out of tracking which stocks Buffett buys and sells on behalf of his company. For those readers, here are two interesting trades Buffett made during the first quarter:

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• Berkshire sold 48,660,056 shares of Bank of America (NYSE: BAC), a stock up 520% since Buffett first took a stake in August 2011. The sale reduced the position 7%, but it's still his company's fourth-largest holding.
• Berkshire added 238,613 shares of Domino's Pizza (NASDAQ: DPZ), a stock up 1,700% since August 2011. The purchase increased the position 10%, but it's still one of his company's smallest holdings.

Read on to learn more about Bank of America and Domino's Pizza.

Image source: Getty Images.

1. Bank of America

Bank of America enjoys a strong market position in several financial services verticals. It is the second largest U.S. bank as measured by total domestic deposits and the third largest investment bank as measured by fees. The company earns most of its money from interest, particularly in consumer banking, which means it is very sensitive to interest rates.

Bank of America is using artificial intelligence (AI) to streamline work and cut costs. Its AI assistant Erica helps businesses and consumers manage their finances, and it has helped employees reduce service desk calls by 50%. The company is also using generative AI to search and summarize market research, and to assist developers with coding projects.

Bank of America reported solid second-quarter financial results. Net interest income rose 7% to $14.7 billion due to strength across loans, debt, and trading account assets. Non-interest income rose less than 1% as higher payment card and brokerage fees were mostly offset by lower investment banking and market making fees. In total, GAAP earnings rose 7% to $0.89 per diluted share.

"Net interest income grew for the fourth consecutive quarter, reflecting eight consecutive quarters of deposit growth and seven percent year-over-year loan growth," said CEO Brian Moynihan in prepared comments for the press release. "Consumers remained resilient, with healthy spending and asset quality."

Bank of America trades at 1.7 times tangible book value, a premium to the 10-year average of 1.5. But the multiple actually hit 1.8 times tangible book value in the first quarter. That somewhat expensive valuation, combined with the prospect of lower interest rates, may explain why Warren Buffett trimmed his position.

Nevertheless, Wall Street anticipates gains for Bank of America shareholders: The median target price of $54 per share implies 14% upside from the current share price of $47.30.

2. Domino's Pizza

Domino's is the largest pizza company in the world. Innovations like anywhere ordering and pinpoint delivery, as well as strategic partnerships with Uber and DoorDash, helped it earn that position. The company has also improved its supply chain in recent years by moving dough production to regional facilities, which ensures a consistent customer experience at different stores.

In addition, regular menu innovation (like parmesan stuffed crust pizza) and promotions have kept Domino's top of mind for consumers. The company regularly beats peers Papa John's and Pizza Hut (owned by Yum! Brands) in same-store-sales growth. Domino's is also using AI to anticipate online orders, visually inspect pizza orders for accuracy, and surface insights from customer comments left on social media.

Domino's reported decent financial results in the first quarter, missing estimates on the top line. Revenue increased 2.5% to $1.1 billion and GAAP earnings increased 21% to $4.33 per diluted share. Importantly, CEO Russell Weiner told analysts the company gained market share during the quarter despite missing medium-term guidance related to the "Hungry for More" goals introduced in 2023.

Wall Street expects Domino's earnings to increase at 10% annually over the next three to five years. That makes the current valuation of 27 times earnings look expensive. I think investors should wait for a better entry point. But most analysts disagree: The median target price of $530 per share implies 14% upside from the current share price of $66.

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Bank of America is an advertising partner of Motley Fool Money. Trevor Jennewine has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Domino's Pizza, DoorDash, and Uber Technologies. The Motley Fool has a disclosure policy.