2 Stocks Buffett Is Buying Hand Over Fist

As perhaps the most successful investor of all time, Warren Buffett is closely watched by investors and market observers.

Lately, the famed Berkshire Hathaway CEO has been fairly inactive as the prices of US stocks have risen. Two stocks Buffett is buying hand over fist, however, are Occidental Petroleum (NYSE:OXY) and his own company, Berkshire Hathaway (NYSE:BRK.B).

Why is Buffett investing so heavily in these shares, and what about these two companies makes him favor them over much of the rest of the US stock market?

Occidental Petroleum

In early June, Buffett went on a buying spree in shares of Occidental Petroleum. Over the course of nine trading days, Berkshire Hathaway acquired over seven million shares of OXY. This brought Berkshire’s total stake in the energy major to 255 million shares or about 28.8% of Occidental overall.

In part, this continued buying activity is likely a function of pure price. The shares bought in June were purchased for around $60 apiece.

This tracks fairly well with Buffett’s history of buying the stock, as the average cost basis across the Berkshire stake is $54.50. In April, however, the stock peaked near $70, likely putting it out of Buffett’s preferred buying range.

The June activity, therefore, seems to have been driven by OXY re-entering a price range where Buffett believed it to be an attractive buy.

As far as value goes, Occidental currently trades at about 15.7x forward earnings and just 5.2x cash flow.

Given that Occidental is continuing to make investments in new capacity and that earnings are expected to grow at a compounded annual rate of 9% over the coming five years, these ratios form a considerable argument for OXY being undervalued.

A quick look at Occidental’s fundamentals also reveals much to like for a value investor like Buffett.

In the last fiscal for instance, Occidental delivered a net margin of 15.6%. This compares very favorably to Exxon Mobil, another major oil company, at just 9.6%. Return on equity, meanwhile, was even higher at 17.5%.

Like many other prime Buffett holdings, Occidental is also a reasonably strong income-generating asset. It currently yields 1.4%, paying out $0.88 in dividends per share annually.

It has a payout ratio of under 25%, meaning that there is still a great deal of room for dividends to rise in the upcoming years.

Given Buffett’s penchant for buy-and-hold strategies that can span multiple decades, Occidental could one day produce a very high yield on cost for Berkshire.

The increasing Occidental stake may also reflect Buffett’s long-term thinking on the price and supply of oil. In February, Occidental CEO Vicki Hollub predicted a potential oil supply crunch coming in 2025.

Hollub’s rationale for this prediction is that most crude oil is currently being extracted from older reserves and new discoveries have failed to keep pace.

While Buffett hasn’t discussed this idea publicly, it’s possible that his thinking lines up with Occidental’s on the supply and demand dynamics of the oil market. If so, Buffett could be banking both on a coming spike in oil prices and on Occidental’s preparations for such an event.

A final key reason Buffett continues to buy Occidental is the fact that he has an unusually broad license to buy up a large portion of the company.

Berkshire has a special regulatory authorization to acquire up to 50% of Occidental. Though the current holdings are nowhere near that level yet, Buffett seems inclined to keep buying when OXY’s price enters his preferred range.

Berkshire Hathaway

The second stock Buffett can’t seem to get enough of is his own company, Berkshire Hathaway.

At Buffett’s behest, Berkshire has drawn down its number of outstanding shares from 2.47 billion in 2018 to 2.16 billion as of the last quarterly report. Last year alone, Berkshire spent over $9 billion on buybacks.

One of the simplest explanations for Buffett’s decision to repurchase shares is that it’s a way for Berkshire to use some of its enormous cash stockpile for the benefit of its investors at a time when there are few undervalued companies large enough for Buffett to buy significant stakes in.

Berkshire ended Q1 with nearly $189 billion in cash and equivalents, a number that is likely to eclipse $200 billion by the end of the year if the company can’t deploy a sizeable chunk of it in new investments.

With a limited field of opportunities in today’s market, concentrating investor ownership in Berkshire itself is likely one of the best ways for Buffett to reward his long-term shareholders.

With that said, Buffett has long been adamant that share buybacks only make sense when the company itself is trading below its intrinsic value. Investors, therefore, should look at the high volume of buyback activity at Berkshire as a judgment of the stock’s favorable price relative to its value.

At first glance, Berkshire may not appear to be significantly undervalued. Its forward P/E ratio of 22.7 is very close to the S&P 500 average of 22.0, suggesting that it’s valued at much the same level as the market overall. Berkshire’s price-to-sales and price-to-earnings-growth ratios are also a bit high at 2.5 and 3.2, respectively.

As with Occidental, though, the company’s attractive fundamentals come into play. To begin with, Berkshire’s net margin of 19.9% is far above the high single-digit to low double-digit levels that predominated through much of the 2010s.

Despite this fact, P/E ratios haven’t moved proportionately higher. Revenues have also continued to advance at a respectable pace over the years, showing that Berkshire is still capable of stable growth despite its already massive size.

Combined with its lack of debt and history of market-beating investment performance, Berkshire’s fundamentals make it look like a somewhat undervalued stock at its current level.

Although the company won’t be able to match the growth rates the large tech firms have set in recent years, Berkshire is a conservative growth play that will likely be able to produce decent returns for many years to come.

By buying shares in his own company while it remains undervalued, Buffett is both rewarding Berkshire shareholders and deploying capital into a solid long-term investment.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.