Following Buffett Into 'Stop the Bleeding' Stocks Has Been a Losing Bet

August 25, 2011 2:02 PM EDT
While Warren Buffett made a valiant attempt to change the Street's mood toward Bank of America (NYSE: BAC), the stock is back to its good ole' losing ways. After opening at $8.29 on news Buffett would make a $5 billion investment in the company, shares are now up just 11 percent to $7.75.

The market is asking this simple question - If you didn't need capital, they why did you do this sweetheart deal with Buffett?

For months and months the bank has insisted there is no capital shortfall and that it would simple boost capital ratios by selling non-core assets. And now this.

Overall it looks like Buffett got a sweet deal – for himself. He is getting a 6 percent dividend on his preferred shares and also received warrants to buy 700 million shares at $7.142857 per share. The warrants were priced just above yesterday's close of $6.99 and are already in the money. If exercised the warrants would give him a 6.5 percent stake in the entire company.

Today's investment in BofA is reminiscent of the Oracle's investment in both Goldman Sachs (NYSE: GS) and General Electric (NYSE: GE) during the heart of the financial crisis.

With those deals, Buffett received a much higher dividend yield. Below are the details:

Goldman Sachs:

September 23, 2008 - $5 billion in cumulative perpetual preferred stock with a 10 percent dividend. Warrant to purchase 43.5 million shares of the common stock at an exercise price of $115 per share.

General Electric:

October 1, 2008 - $3 billion perpetual preferred stock with a 10 percent dividend. Warrants to purchase 135 million shares of common stocks at $22.25 per share

When you consider the above two Buffett "stop the bleeding" investments versus today's BofA deal, you have to explore the share price action before and after the investment.

In the case of Goldman:

Sept. 23, 2008 close = $125.05

Nov. 21, 2008 credit crisis low = $47.41

Current = $109.83

In the case of GE:

Sept. 30, 2008 close = $25.50

March 4, 2009 credit crisis low = $5.87

Current = $15.38

So looking at the above data you will see that the stock of Goldman had another 62 percent downside from the Buffett investment and currently - years later – is still down about 12 percent. GE had another 80 percent short-term downside and is down 40 percent from the Buffett investment level.

While Buffett got a sweet deal for himself on Goldman and GE, any common shareholder that would have followed him in would have been hurt badly.

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