Is Warren Buffett’s Favorite Stock Overbought? Occidental Petroleum Gets Downgrade From Analysts

Topline

Shares of Occidental Petroleum, a favorite of billionaire investor Warren Buffett, fell 2% on Monday after Goldman Sachs analysts downgraded the stock and warned valuations look less attractive after a massive rally and “sharp outperformance” so far this year.

Key Facts

Goldman downgraded shares of Occidental Petroleum on Monday from a “buy” rating to “neutral,” assigning the stock a $70 price target—implying roughly 15% upside from current levels.

“While we continue to see an attractive free cash flow outlook,” Occidental Petroleum’s valuation looks less attractive, especially relative to other energy companies and after the stock’s massive runup, says Goldman analyst Neil Mehta.

The energy giant is the top-performing stock in the S&P 500 so far in 2022, rising by over 90% thanks to the spike in oil prices this year, while the Energy Select Sector SPDR Fund is up only 22% during that period.

After Occidental’s “outperformance relative to peers,” other energy stocks are starting to have more compelling valuations, he writes, pointing to the likes of ConocoPhillips, which has underperformed with only a 16% gain this year.

Other large energy companies such as Exxon Mobil, ConocoPhillips, Hess and Pioneer Natural Resources all have far more upside—of about 40%, based on Goldman’s price target estimates—than Occidental, Mehta argues.

Shares of Occidental fell 2% to less than $60 per share on the news, erasing most of their gains from last week, when the stock rose roughly 3% as oil prices rebounded somewhat.

What To Watch For:

Occidental Petroleum is one of billionaire investor Warren Buffett’s favorite stocks. His investing conglomerate, Berkshire Hathaway, now owns roughly 175 million shares, an 18.7% stake in the company that is worth nearly $10.5 billion based on current prices. Buffett’s buying spree started in late February just as oil prices started to spike, with the latest purchase of Occidental shares coming as recently as last week. Berkshire is by far and away the largest shareholder in the energy giant, fuelling speculation among analysts in recent months whether the billionaire investor will continue to increase his stake to 20% or more.

Key Background:

Energy companies have been enjoying robust profits as oil prices have surged higher this year—with Brent crude peaking at nearly $140 per barrel in early March, shortly after Russia’s invasion of Ukraine. Energy stocks pared back gains in June, however, as oil prices came back down to earth somewhat, now hovering at just over $100 per barrel. With recession fears continuing to weigh on markets, investors have grown increasingly concerned about an economic downturn weighing on global demand, though major Wall Street firms largely predict oil will trade at between $110 and $130 per barrel by the end of 2022.

Tangent:

Buffett’s investing conglomerate also owns a sizable stake in another energy giant, Chevron. Thanks to a position worth more than $20 billion, it is currently one of Berkshire’s top holdings after the likes of Apple and Bank of America.

Further Reading:

Warren Buffett Adds To Massive Stake In Occidental Petroleum, Buying The Dip After Oil Prices Drop (Forbes)

Oil Selloff Continues Amid Recession ‘Panic,’ But Analysts Predict Prices Will Rebound Later In 2022 (Forbes)

Warren Buffett’s Favorite Stock Soars, Netflix Fumbles: These Are The Best And Worst Performing Stocks Of 2022 (Forbes)

Warren Buffett’s $51 Billion Stock Market Shopping Spree: Here’s What He’s Buying (Forbes)