The bull market has started broadening out beyond just tech and artificial intelligence names.
Previously unloved sectors like Utilities (up more than 26% in the last six months) and Real Estate (up 21%) have started to shine.
In fact, of the 11 S&P 500 sectors, only one is in the red in the last six months–Energy.
Energy is lower by more than 5% in that time and is essentially unchanged (up 0.2%) over the last year.
It’s not entirely unexpected, given that oil prices remain near $70 per barrel despite rising fears of escalation in the Middle East.
Beyond the concerns about the Middle East, however, recent Fed policy moves have also laid out a path to potentially higher energy prices in the future.
While interest rate-sensitive areas of the market like real estate and small-cap stocks are the obvious beneficiaries of lower rates, if inflation is truly behind us (and the job market continues to hold up), the next step on the path to a “soft landing” would be stronger economic growth.
The kind of economic growth that could prompt outperformance in energy and commodity plays.
Of course, one big caveat is that oil and commodities are global assets, and continued economic weakness in China could have an outsized impact on those assets.
But China’s recent economic stimulus moves are a step in the right direction, even if the outcome is still up in the air.
Should Beijing succeed in stirring up more economic activity overseas, and should the “soft landing” scenario play out, oil and energy stocks are well-positioned coming out of a period of underperformance.
Which brings us back to one of Warren Buffett’s preferred energy stocks – Occidental Petroleum (OXY).
Warren Buffett has been regularly buying shares of OXY since the third quarter of 2019 and has gradually grown his stake to over $13 billion, or more than 4% of Berkshire Hathaway’s portfolio.
In that time (as reported in the firm’s 13F filings), the firm has had a total of 32 buy transactions against only two sales of OXY shares.
That stake may not be massive for Berkshire (the sixth-largest portfolio position) but it’s an outsized position in the company, just under one-third of all outstanding shares in OXY.
And Buffett can buy more, if he’s so inclined. In 2022, Berkshire received permission from regulators to buy up to 50% of Occidental.
Now, Buffett has expressed that he has no intention of trying to engineer a takeover of Occidental, but that doesn’t preclude him from continuing to add to his stake.
In Berkshire’s latest filing (on August 14), the company disclosed that it had purchased another 7 million shares of OXY.
In the same filing, Berkshire showed that it had also reduced its stake in the firm’s other (and slightly larger) portfolio oil position: Chevron (CVX).
The firm pared back its Chevron stake by about 4 million shares, but Chevron remains Berkshire’s biggest bet on oil.
Given that both firms are decent-sized chunks of Berkshire’s portfolio, either company can lay claim to Buffett’s support.
And, in fact, Chevron is the higher yielding of the two companies (4.4% dividend yield vs. a 1.7% yield for OXY).
In other words, there’s a compelling case to invest in either.
The most compelling case for choosing OXY over CVX, however, is that Buffett is growing his stake there while cutting (albeit slightly) his stake in Chevron.
For Berkshire, those adjustments may be little more than “playing around in the margins,” but (unless you’re prioritizing the income) it’s a strong enough signal that OXY may be the better oil stock play.
