Warren Buffett once said, “Wall Street is the only place people drive to in a Rolls Royce to get advice from those who take the subway.” It’s fair to say that Buffett doesn’t place too much stock in the opinions of Wall Street analysts.
However, analysts think highly of some of the stocks that Buffett likes. As an example: $12.9 billion in Buffett’s Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B) The portfolio is invested in one stock that Wall Street believes could rise 25% over the next twelve months.
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Buffett is putting a lot more money into building Berkshire’s cash hoard than he is buying shares these days. However, there is one stock he has consistently bought almost every quarter since the start of 2022: Western petroleum (NYSE:OXY).
Occidental is now the sixth largest holding company in Berkshire Hathaway’s portfolio. Berkshire’s stake in the U.S. oil and gas producer is worth about $12.9 billion at recent prices.
In his latest letter to Berkshire Hathaway shareholders, Buffett highlighted eight stocks that he expects the conglomerate to own “indefinitely.” Occidental was in the group. And it was the only one he continued to buy regularly.
Why does the legendary investor love Occidental so much? The company’s major oil and gas interests in the US top the list. Buffett also likes Oxy’s carbon capture and storage initiatives. Furthermore, he admires and respects Vicki Hollub, CEO of Occidental. Buffett wrote in his annual shareholder letter that Hollub knows “how to separate oil from rock, and that is an uncommon talent, valuable to her shareholders and to her country.”
Wall Street seems more bullish on Occidental Petroleum than any other stock in Berkshire’s portfolio. The 12-month average price target for oil stocks reflects an upside potential of around 25%. Even the lowest price target among the analysts surveyed LSEG is 6.5% above Occidental’s current stock price.
We only have to look at Occidental’s third-quarter results released Tuesday to understand some of the reasons behind analysts’ bullish view of the stock. Oxy generated strong operating cash flow of $3.8 billion in the third quarter. Adjusted earnings per share were well above consensus expectations. The company’s production was also at the top midpoint of its guidance range.
Valuation is also likely an important consideration for Wall Street. Occidental’s stock price is 29% below its peak from earlier this year. The stock trades at a price-to-earnings ratio of 12.5, compared to an earnings multiple of 14.6 for the S&P500 energy sector.
Admittedly, not all analysts are fans of Occidental. For example, Evercore ISI Group gave the stock an ‘underperform’ rating on September 30. Several analysts also recommend holding Occidental rather than buying the stock, despite setting optimistic price targets.
I wouldn’t bet that Occidental Petroleum’s stock price will rise 25% over the next twelve months, as the Wall Street consensus predicts. The company’s fortunes depend heavily on oil prices – and it’s impossible to know what oil prices will do in the short term.
That said, energy independence will almost certainly become more important in the coming years. Occidental’s domestic oil and gas reserves should increase in value. I’m cautiously optimistic about the prospects for the company’s carbon capture technology.
I also fully expect Buffett to continue buying Oxy stock. Berkshire currently owns 27.3% of the company. It received approval from the Federal Energy Regulatory Commission in 2022 to acquire up to 50% of Occidental. Buffett hinted at additional purchases in his shareholder letter earlier this year, writing that Berkshire owns warrants that give the company the option to “substantially increase our ownership at a fixed price.”
Buffett doesn’t care what Wall Street thinks about Occidental. But I suspect analysts’ positive view of the stock is justified.
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Keith Speights holds positions at Berkshire Hathaway. The Motley Fool holds positions in and recommends Berkshire Hathaway. The Motley Fool recommends Occidental Petroleum. The Motley Fool has a disclosure policy.
$12.9 billion of Warren Buffett’s portfolio is invested in one stock that Wall Street thinks could rise 25%, originally published by The Motley Fool
