This year has been quite a rollercoaster. Warren Buffett’s portfolio, notably managed through Berkshire Hathaway, saw significant cuts in some key positions. Nevertheless, recent filings reveal that Berkshire is heavily invested in one of Buffett’s favorite stocks, increasing its investment by over $500 million last quarter.
In theory, this stock has a lot going for it. It’s currently available at prices that seem lower than the market average and offers appealing services. With a decent dividend yield, it could also provide solid growth in the upcoming years.
Berkshire Hathaway’s first major investment in Chevron came about during the unsettling early days of the COVID-19 pandemic in 2020. Buffett’s estimated buy-in price was around $80. Since then, he’s actively altered his position. For example, in early 2021, merely a year after his initial acquisition, he reduced his Chevron shares by over half. Yet, by the end of that year, he started buying again, with more transactions in 2022, including acquiring a notable 121 million shares in the first quarter.
Interestingly, recently, Berkshire has been more of a seller than a buyer. In fact, out of the last seven quarters, they sold more Chevron shares than they acquired during six of those. But things took a turn this past quarter, as Buffett purchased around 3.5 million shares, valued at approximately $520 million. That ended up being one of his largest stock purchases this quarter, resulting in a 7% stake in Chevron.
So, what motivated Buffett to invest heavily in a well-known oil giant? The numbers provide a strong argument.
Despite years of consistent performance, the overall stock market doesn’t seem particularly appealing right now. For instance, the S&P 500 has a price-to-earnings ratio of 31, significantly higher than its historical average. In contrast, Chevron’s stock trades at just 19x. While current earnings growth is stagnant, the company still boasts robust free cash flow, which backs its 4.5% dividend yield.
However, some challenges affecting Chevron’s stock aren’t exactly within the company’s control. Oil prices have dwindled significantly this year, dropping below $60 per barrel. Additionally, oil inventories are rising, and a surplus is anticipated by 2026 due to increased global production. All of this presents a tough environment for oil-selling companies.
