Some analysts compare oil to tobacco in the 1990s. Despite all the studies showing that smoking damages health, tobacco companies continued doing just fine, outperforming and returning value to the shareholders.
The situation isn't much different in the 2020s, except this time, the culprit is the world's energy addiction that cannot be changed on a whim.
Thus, it is not surprising that institutional investors like Warren Buffett are pouring billions into the oil industry, taking a significant stake inOccidental Petroleum Corporation($Occidental(OXY)$ ) once again.
Buffet Buys Back In
Occidental Petroleum made headlines back on March 12, 2020, as it was the only one out of 500 stocks that compose the S&P 500 index to close green for the day. Yet, this was not due to its strength but a bounce after a strong sell-off. Berkshire Hathaway sold its stake back then, but now it has been rebuilding it back up.
According to the latest data, Buffett invested over US$4.5b at prices between US$47.07 and US$58.58. Additionally, Berkshire has grants to invest an additional US$5b at a price per share of around US$59.62, as well as 100,000 shares of preferred stock.
Although Buffett doesn't prefer to invest based on macroeconomic predictions, he limits the downside risk by investing in a business that he thoroughly understands.
What's the opportunity in Occidental Petroleum?
Ourvaluation modelshows thatthe intrinsic value for the stock is $76.38,but it is currently trading at US$57.95 on the share market, meaning that it is still trading at an attractive valuation.
Discounted cash flowis the methodology behind our approach as we based our assumptions on the 2 stages free cash flow model. We have used an average of 14 analyst estimates for OXY, and you can see the details behind our reasoning by clicking on the "view data" box on our platform.
What's more interesting is that Occidental Petroleum's share price is quite volatile, which gives us more chances to buy since the share price could sink lower (or rise higher) in the future. This is based on its high beta, which is a good indicator of how much the stock moves relative to the rest of the market.
What does the future of Occidental Petroleum look like?
NYSE: OXY Earnings and Revenue GrowthMarch 14, 2022
Investors looking for growth in their portfolio may want to consider a company's prospects before buying its shares.Although value investors would argue that it's the intrinsic value relative to the price that matters the most, a more compelling investment thesis would be high growth potential at a low price.
With profit expected to grow by 26% over the next couple of years, the future seems bright for Occidental Petroleum. It looks like higher cash flow is on the cards for the stock, which should feed into a higher share valuation.
What this means for you:
- Are you a shareholder?Congrats! If you bought the stock anytime in the last 2 years, you are probably doing well. If you want to add to the position, you might consider watching the stock, as it seems like the foreseen growth has not yet been fully factored into the share price. However, other factors such as financial health are to consider, which could explain the current undervaluation.
- Are you a potential investor?If you've been keeping an eye on OXY for a while, you might consider waiting for a pullback. This is a somewhat volatile stock, and it may pull back at some point, giving a better average buying price than right now at a multi-year high.
Buffett's purchase is usually seen as a green light for the broad audience that religiously follows his moves. Yet, while his track record is legendary, it is not spotless. Even the best investors make mistakes.
In light of this, if you'd like to do more analysis on the company, it's vital to be informed of the risks involved.Every company has risks, and we've spotted2 warning signs for Occidental Petroleumyou should know about.
Source: Simply Wall St
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