For decades, Berkshire Hathaway (NYSE:BRK.B) Chairman and CEO Warren Buffett maintained a pretty conservative approach to investing, favoring retail and banking stocks while giving a wide berth to more volatile sectors such as tech and energy. In fact, big American banks have been Warren Buffett’s favorite investment because they are part of the infrastructure of the country, a nation he continually bets on.
As recently as late 2019, Berkshire had large stakes in four of the five biggest U.S. banks, with Wells Fargo remaining Buffett’s top stock holding for three straight years through 2017.
But Buffett appears to have changed his investing ethos quite dramatically over the past couple of years, taking new multi-billion dollar stakes in energy and computer corporations while shunning the banking sector.
After the onset of the coronavirus pandemic in early 2020, Buffett unloaded Wells Fargo (NYSE:WFC), JPMorgan (NYSE:JPM) and Goldman Sachs (NYSE:GS) on the cheap, despite many stocks in the sector becoming significantly cheaper to own.
“I like banks generally, I just didn’t like the proportion we had compared to the possible risk if we got the bad results that so far we haven’t gotten,” Buffett told investors at last year’s shareholder meeting.
Various analysts have shared their takes on Buffett’s banking divestments.
“What this is telling you is, 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 all indications are that we’re in a high inflation, high rate environment for a while. What that typically means is that lending activity is going to be compressed and investment activity is going to be depressed,” Phillip Phan, a professor at the Johns Hopkins Carey Business School, has told CNBC.
Despite rising interest rates this year, which typically boost banks because lending margins improve, the banking sector has been hammered: WFC is down 14.0% YTD, JPM has cratered 26.2% while GS has lost 22.7% on concerns that the U.S. economy could stall as the Fed combats inflation with interest rate hikes.
Buffett’s Energy Investments
Buffett has been doubling down on his energy investments while trimming his banking holdings despite oil and gas stocks being at multi-year high valuations.
To wit, the legendary investor has added new shares in red-hot E&P companies Occidental Petroleum Corp. (NYSE:OXY) and Chevron Inc. (NYSE:CVX) despite both currently trading at multi-year highs.
According to Berkshire’s latest 13F filing, the company bought 118.3M OXY shares in multiple transactions from March 12 to March 16, bringing its stake in OXY to 136.4M shares, or ~14.6% of its shares outstanding. Berkshire also owns OXY warrants granting the right to acquire some 83.9M additional common shares at about $59.62 each plus another 100,000 OXY preferred shares. Earlier, Berkshire revealed that it purchased about 9.4 million shares of oil titan Chevron in the fourth quarter, boosting its stake to 38 million shares currently worth $6.2 billion.
OXY has more than doubled over the past 12 months, while CVX is up 50%, with both stocks trading near multi-year highs. But, obviously, Buffet thinks they still have plenty of upside judging by the huge positions opened by his investment conglomerate.
Buffett is hardly alone.
OXY CEO Vicki Hollub has snapped up OXY shares in the open market, even as shares trade near three-year highs. According to an SEC filing, Hollub paid $798K on March 28 for 14,191 OXY shares at an average price of $56.24, raising her holdings to 467,282 shares and an additional 23,390 shares through a savings plan. Hollub last bought OXY shares on the open market nearly three years ago, when she paid $1.8M for 37,460 shares at an average $48.15/share on June 10, 2019.
Wall Street is enthralled by OXY, too.
Raymond James analyst John Freeman recently raised his OXY price target to $85 from $60, setting a new Wall Street high. That’s good for nearly 50% upside.
OXY has 9 Strong Buy ratings; 2 Buy, 13 Hold, 1 Sell and 1 String Sell ratings on Wall Street.
Meanwhile, Shale player APA Corp. (NYSE:APA) has popped to a 52-week high after Mizuho upgraded shares to Buy from Neutral with a $56 price target, up from $38, saying the company is in a “unique spot” among oil and gas producers.
Mizuho says APA has a “clear plan for 10%-plus cash return 2022-24 at current oil prices along with near-term growth (Egypt) and longer-term development (Suriname) catalysts outside the U.S.“
“Energy is the only sector that is seeing quality, growth, and momentum scores improve simultaneously while maintaining an attractive value and income profile,” JPMorgan’s Dubravko Lakos-Bujas has told Business Insider, adding that current estimates are conservative and understate the strong macro fundamentals going forward.
According to JPM, the energy sector still has considerable upside despite its massive runup over the past year. JPM says that a combination of rapid earnings growth and re-ratings for key multiples will help drive further upside in the sector.
A final note: oil stocks remain undervalued, with the S&P energy sector still lagging far behind its 2014 levels from the last time oil crossed $100 per barrel.
By Alex Kimani for Oilprice.com
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