Buffett bets big on oil and gas stocks
For decades, Berkshire Hathaway (NYSE:BRK.B) Chairman and CEO Warren Buffett has maintained a fairly conservative approach to investing, favoring retail and banking stocks while leaving plenty of room for to more volatile sectors such as technology and energy. In fact, America’s big banks have been Warren Buffett’s business preferred investment because they are part of the infrastructure of the country, a nation he continually bets on.
As recently as the end of 2019, Berkshire had significant stakes in four of the five largest US banks, with Wells Fargo remains Buffett’s top stock held for three consecutive years through 2017.
But Buffett appears to have radically changed his investment philosophy over the past two years, taking new multibillion-dollar stakes in energy and IT companies while avoiding the banking sector.
After the coronavirus pandemic began in early 2020, Buffett unloaded Wells Fargo (NYSE: WFC), JP Morgan (NYSE: JPM) and Goldman Sachs (NYSE:GS) cheap, despite many stocks in the sector becoming significantly cheaper to own.
“I like banks in general, I didn’t like the proportion we had compared to the possible risk if we got the bad results that we haven’t gotten so far,Buffett told investors at last year’s shareholder meeting.
Various analysts shared their views on Buffett’s bank divestments.
“What that tells you is that he thinks we need to batten down the hatches because we’re looking at a long cycle of inflation and probably stagnation. Banks are very cyclical, and there’s every indication that we’re in inflation. high, high rate environment for a while, which generally means lending activity is going to be compressed and investment activity is going to be depressed“, Phillip Phan, a professor at Johns Hopkins Carey Business School, told CNBC.
Despite rising interest rates this year, which typically boost banks due to improved credit spreads, the banking sector has been hammered: WFC is down 14.0% year-to-date , JPM cratered 26.2% while GS lost 22.7% on fears the US economy could stall. the Fed fights inflation by raising interest rates.
Buffett’s energy investments
Buffett doubled his energy investments while trimming his bank holdings despite oil and gas stocks having high multi-year valuations.
Namely, the legendary investor added new shares in burning E&P companies Occidental Petroleum Corp. (NYSE:OXY) and Chevron inc. (NYSE:CVX) although both are currently trading at multi-year highs.
According to Berkshire’s Last 13F Folder, the company purchased 118.3 million shares of OXY in multiple transactions from March 12-16, increasing its stake in OXY to 136.4 million shares, or ~14.6% of its outstanding shares. Berkshire also holds OXY warrants giving the right to purchase some 83.9 million additional common shares at approximately $59.62 each, plus another 100,000 OXY preferred shares. Earlier, Berkshire revealed it bought about 9.4 million shares of oil titan Chevron in the fourth quarter, boosting its stake to 38 million shares with a current value of $6.2 billion.
OXY has more than doubled in the past 12 months, while CVX is up 50%, with both stocks trading near multi-year highs. But, obviously, Buffet thinks they still have a lot of potential judging by the huge positions opened by his investment conglomerate.
Buffett is not alone.
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Vicki Hollub, CEO of OXY, has bought back OXY shares in the open market, even as stocks trade near three-year highs. According to a Filing with the SEC, Hollub paid $798,000 on March 28 for 14,191 OXY shares at an average price of $56.24, increasing his holdings to 467,282 shares and an additional 23,390 shares through a savings plan. Hollub last bought OXY stock on the open market nearly three years ago, when it paid $1.8 million for 37,460 shares at an average of $48.15 per share on June 10. 2019.
Wall Street is also fascinated by OXY.
Raymond James analyst John Freeman recently raised his OXY price target from $60 to $85, setting a new high on Wall Street. That’s good for nearly 50% upside.
OXY has 9 strong buy reviews; 2 buy, 13 hold, 1 sell and 1 sell odds on Wall Street.
Meanwhile, Shale’s player APA Corp. (NYSE:APA) hit a 52-week high after Mizuho upgraded stocks to buy from Neutral with a price target of $56, down from $38 previously, saying the company is in a “unique position” among oil and gas producers.
Mizuho says APA has a “clear plan for a 10%+ cash return 2022-24 at current oil prices, as well as catalysts for near-term growth (Egypt) and longer-term development (Suriname) outside the United States“
“Energy is the only sector that sees its quality, growth and momentum scores improve simultaneously while maintaining an attractive value and revenue profile.JPMorgan’s Dubravko Lakos-Bujas told Business Insider, adding that current estimates are conservative and underestimate strong macro fundamentals going forward.
According to JPM, the energy sector still has considerable upside despite its massive rise over the past year. JPM says a combination of rapid earnings growth and revaluation of major multiples will help boost the sector further.
A final remark: oil stocks remain undervalued, with The S&P energy sector is still far behind its 2014 levels since the last time oil broke $100 a barrel.
By Alex Kimani for Oilprice.com
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