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Warren Buffett has continued to snap up millions of shares of Occidental Petroleum (OXY) in recent months despite the company's stock posting a 9.7% loss so far in 2023, according Morningstar data through June 22. So why is one of the world's most successful investors consistently buying up shares of a losing stock? Experts say it all comes down to timing - but beware: attempting to replicate the 92-year-old philanthropist's approach doesn't mean you'll make money. (Looking for a new financial adviser? This tool can match you to an adviser who may meet your needs.)
After adding nearly 4.66 million shares of Houston, Texas-based petrochemical manufacturing company to his portfolio back in late May, and another 2.2 million by the end of that month, Buffett's investment firm Berkshire Hathaway has amassed 222 million total shares of the company's stock worth an estimated $13 billion, or a 24.9% stake. In the first six months of 2023, however, OXY has largely underperformed broader market indexes with the S&P 500 Index ( ) gaining 14.13% and the Dow Jones Industrial Average ( ) up 4.97% through June 22, according to Morningstar. Over the past 12 months, OXY has posted a 3.53% loss with SPX and DJIA both notching gains of 16.27% and 11.65%, respectively, data show.
What's behind the stock's short-term declines? Dave Meats, a chartered financial analyst and director of research, energy and utilities at financial services firm Morningstar, says much of the reasoning behind OXY's near-term losses, much like the broader energy sector, relates to falling commodity prices. "WTI crude has declined over $6 this year, as supply losses from Russia have been milder than expected, while the broader economy is growing more slowly," he says. Commodity prices, much like stocks, are largely tied to the powers associated with supply and demand - when demand is low, prices typically diminish; when they are high, prices rise. (Looking for a new financial adviser? This tool can match you to an adviser who may meet your needs.)
Despite OXY's losses so far this year, the company has nevertheless either outperformed or posted figures similar to many of its industry peers, including Chevron Corp. ( ), EOG Resources Inc. ( ) and Pioneer Natural Resources Co. ( ), each of which have YTD losses of 13.28%, 14.38% and 8.44%, respectively as of June 21, according to Morningstar.
But viewing OXY's performance numbers over certain segments may provide some insight as to why Buffett has his eye on this particular company. Aside from both short-term and even a longer-term annualized loss of 5.45% over the 5-year period, OXY notched a whopping 100.46% gain sInce October 30, 2020, according to Morningstar data.
While being invested in OXY during that specific timeframe would have delivered its investors handsomely, the shorter term underperformance has not stopped Buffett from rapidly purchasing shares and betting that tides will soon turn. Does that mean you should invest in OXY and expect to cash in with Buffett, too? Simply put, Nicholas Bunio, certified financial planner, Retirement Wealth Advisors, says that's probably not the best strategy or way to gauge where to put your savings.
"Let me say this, I love Warren Buffett," Bunio says. "I have so many of his books and have followed him even in high school when I was interested in investing. But here is what I've learned over the last 18 years - Mr. Buffett invests for his company, Berkshire Hathaway," and "this company, in theory, can last indefinitely."
Unlike the average investor, investment firms such as Berkshire Hathaway have quite a bit of financial cushion to buffer them from big losses that most of us can't withstand. As of March 31, the firm reported a 2.84% year-over-year asset increase to a total of $997.07 billion dollars, according to a MacroTrends report. For the part of Buffett and his firm, Bunio says they can afford to lose quite a bit more than the average investor. "These investments can fluctuate, tank for five years or 20, then recover," he says. "But you, as an individual or family, don't have this time. If you're retiring in 10 years, you don't have that kind of time to wait. If you just retired and lost 50% of your money, you could be in real trouble."
To be sure, as many as 150 million Americans own shares of stock, with a recent Motley Fool report finding the median value of stocks held directly by U.S. families was $25,000 in 2019. Needless to say, the investment goals of the top 1% of investors, who own 53% of stock shares worth $16.76 trillion, are likely not identical to the average investor.
Knowing the value of what you're investing in is one of the most critical factors when it comes to stock selection, Bunio says. When it comes to OXY, the stock "does have some hallmarkings of a Buffett stock," Bunio says, adding that "its P/E ratio is very low, and the price is down."
P/E ratio is one key metric investors often use to compare the value of a company's stock price with its earnings over a set period. For some context, the P/E ratio is equal to the price of the share of a stock, divided by the company's earnings-per share. In general, investors often consider a P/E ratio of 20 to 25 in the average range, according to a report from SmartAsset. In other words, a P/E ratio of 15 means that investors would be willing to pay $15 for every dollar of a company's earnings, the report says.
"Low PE ratio stocks, or value stocks, tend to do better in the long-term than high PE ratio stocks, growth stocks since high PE ratio stocks require constant high growth in the business in order to keep the stock price high," Bunio says.
In the case of OXY, Morningstar data show its P/E ratio is significantly lower than the industry average. At 6.59 for the trailing 12 months (TTM) ending in May 2023, its P/E ratio is significantly lower than where this data point was in May 2022 at 10.49. In March 2022, one month after Russia's invasion of Ukraine, OXY's P/E ratio was 27.34%, data show.
Aside from the value of an individual company stock, Steve Kolano, managing director of investments at Integrated Partners, says any investor placing their bets on any one company at a given time must also understand the risks of that specific company are magnified. "In addition to the company's natural exposure to the economy and sector or industry fundamentals, an investment in an individual company highlights more specific catalysts - positive or negative - of that company, such as company management or management changes that may be happening, new product launches, restructuring, specific assets on the balance sheet or other characteristics that are unique to that company in relation to its relative valuation," Kolano says. (Looking for a new financial adviser? This tool can match you to an adviser who may meet your needs.)
Calculating all of these potential variables, as you can imagine, takes quite a bit of effort. For some investors, Meats admits keeping track of all of these variables and making the right calls can help to bolster investor returns, "but it should only be undertaken by those that have the additional risk tolerance, time, and aptitude to conduct the appropriate upfront analysis and ongoing ability to monitor their investments over time," he says, adding that "just as important as the initial valuation analysis, investors must monitor their portfolio to determine if there are changes in the underlying business or sector that would require them to revise their analysis and investment thesis."
Much like the way Buffett's firm Berkshire Hathaway operates, Meats says most investors are typically best served by having a diversified portfolio across multiple asset classes and categories. In broad terms, a diversified portfolio involves investing money into various types of stocks, bonds and other securities together in one unified place to ensure all of your money isn't betting on the performance of any one stock. "This diversification will help to offset some of the idiosyncratic risk of investing in individual stocks and reduce volatility across market cycles," he says.
Amy Hubble, principal investment advisor at Radix Financial in Oklahoma City, says although a concentrated position can indeed make you wealthy, it could also wipe you out. "Just ask the employees of SVB or First Republic who had their retirement funds in employer stock up until three months ago," she says, adding that "diversification is what keeps you rich. By investing in many great companies - at least 20 - in multiple sectors, industries, and life-stages you can protect yourself from the idiosyncratic risk inherent in a single company."
If that approach sounds too complicated, you're not alone. Most of us admit we are not experts when it comes to investing and financial management. A survey from IntelliFlo found that 59% of Americans want a professional to manage their finances. That said, only 32% actually use a registered financial adviser for financial advice. (Looking for a new financial adviser? This tool can match you to an adviser who may meet your needs.)
However, cutting corners with your money can lead to bigger problems in the end, Bunio says. "I've met plenty of people who DIY their own investments, load up on stocks like Tesla, or Buffett-like stocks, even in retirement, only to get crushed in the short-term," he says, adding that "a professional would make sure their investments not only grow, but responsibility."
But, if it's simply your aim to invest in what Warren Buffett invests in, Hubble says it doesn't have to be that complicated. "You don't need to do it yourself," she says. "Simply purchase shares of and let him do the work for you."
This article has been updated to reflect data from a Motley Fool report that the median value of stocks held directly by families as of 2019 was $25,000. An earlier version misstated that the number was an average.