Although the S&P 500 is up nearly 23% this year, 119 stocks in the benchmark index have lost value (as of Oct. 11), and one is the sixth-largest position in Berkshire Hathaway‘s (BRK.A 0.12%) (BRK.B -0.23%) $300 billion-plus stock portfolio. Berkshire’s CEO Warren Buffett and his team of investing lieutenants are some of the best investors in the world. However, they are also long-term investors, so it can take time for some of their positions to pan out. Investing is also difficult, and even Buffett would acknowledge that he makes mistakes just like everyone else.
One of Berkshire’s top holdings has struggled compared to the broader market, but the conglomerate continues to hold the stock. Should investors shake off the losses and buy the dip?
Buffett and Berkshire have been buying this stock big-time
Berkshire first began adding Occidental Petroleum (OXY -0.12%), one of the largest domestic oil and gas producers, in the back half of 2019. Since then, Buffett and Berkshire have not stopped. Berkshire now owns close to 28% of all outstanding shares, and the position makes up nearly 4.5% of Berkshire’s total portfolio.
An investment in Occidental is a bet on oil, and Berkshire is no stranger to the commodity, given the slate of energy assets it owns. Between the pandemic and geopolitical tensions in Ukraine, Russia, and the Middle East, West Texas Intermediate crude oil prices, considered a benchmark for U.S. oil prices, have been all over the map in recent years.
WTI Crude Oil Spot Price data by YCharts.
Buffett said he got interested in Occidental after reading one of the company’s earnings transcripts. Berkshire also owns $10 billion of preferred stock and warrants the company received from Occidental after it helped fund one of the company’s acquisitions in early 2019. When oil prices surged past $100 in 2022, Occidental took advantage of record profits and free cash flow. It paid down $10.5 billion of debt, repurchased $3 billion of stock, and increased its quarterly dividend by 38%. Buffett has long been a fan of capital distributions.
But Occidental has struggled this year and is down 8%. U.S. oil demand and price forecasts have been trimmed for next year. WTI crude prices per barrel are expected to fall to $73.13, down slightly from where they are now.
Should you buy the dip?
Whether to buy the dip depends on your view of oil prices, which I will not try to predict. While oil demand is expected to fall next year, two things could lift oil higher. One would be the conflict in the Middle East. If Israel strikes Iran’s oil infrastructure, that could lead oil prices to rise by $10 or $20 per barrel, according to Goldman Sachs. A further response by Iran could also jack up oil prices.
The Federal Reserve has started lowering interest rates. The agency cut its benchmark federal funds rate by 50 basis points in September and is expected to keep cutting throughout 2025. Lower interest rates typically weaken the dollar because there will be less demand for foreign investment, and oil prices have historically had a negative correlation to the U.S. dollar, so a weaker dollar could, in theory, lead to a rise in oil prices.
But I would caution investors from placing too much emphasis on history, as it’s more than possible that lower interest rates won’t lead to a weaker dollar or that oil prices won’t always maintain an inverse relationship. The good news is that Occidental can break even on production with oil at less than $60 per barrel, so there is some margin for error.
Ultimately, I think there is a place for Occidental in your portfolio. If nothing else, it can be a hedge against geopolitical tensions.
Bram Berkowitz has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway and Goldman Sachs Group. The Motley Fool recommends Occidental Petroleum. The Motley Fool has a disclosure policy.
