Warren Buffett’s bet on Occidental Petroleum Corp. OXY-N supports the long-term case for oil and gas stocks at a time when global demand for traditional energy sources is on the rise.
His stake in the U.S. oil and gas producer also raises the question of how other sophisticated investors are approaching the sector amid concerns of slowing global economic activity.
The answer: Their interest in it appears to be rising.
Mr. Buffett, through Berkshire Hathaway Inc., BRK-B-N has emerged as Occidental’s largest shareholder, with a 20-per-cent stake. Some observers believe he may be interested in acquiring the entire company.
The Warren Buffett effect, in which investors follow the great investor’s lead into a stock, driving prices higher, is alive and well here. Occidental’s share price this year is leading the S&P 500 Index, with a gain of 157 per cent.
You could follow Mr. Buffett, at the risk of buying shares at prices well above what he paid for them or discovering he was wrong on this bet.
Here’s another approach: Look for energy stocks that are garnering institutional interest, but so far have not attracted Mr. Buffett’s golden touch.
Jeremy McCrea, an analyst at Raymond James, took this approach in a research note released this week. He delved into the energy-stock trades of about 5,800 global funds to uncover the most popular buying ideas.
The rationale here? Investors should consider factors such as a company’s profitability, balance sheet health and stock valuation. But shareholder sentiment – again, think of what Mr. Buffett’s interest in a stock can do here – can be crucial to the direction of a stock.
“Although a company may score well on all these other points, a company’s share performance can remain muted if the name is off the radar screen for potential investors,” Mr. McCrea said in his note.
He restricted his search to Canadian mid-cap energy explorers and producers valued at more than $500-million, which can post impressive returns when commodity prices are strong.
Mr. McCrea discovered several interesting trends.
One: Institutional money is flowing into the space. These sophisticated investors bought $1.4-billion worth of energy stocks in the second quarter, which he extended until Aug. 15 to make the research more current.
“This was one of the highest levels we’ve seen in the last few years,” Mr. McCrea said.
The second trend: Funds with large assets under management are particularly interested in the energy sector. The 50 biggest funds accounted for 76 per cent of the buying activity.
These large funds typically take longer to make an investment than small ones. But when they do, Mr. McCrea said, they tend to make bigger investments over a number of quarters, simply because it takes more time for a large fund to build positions in a stock.
Third: Generalist funds, which hold less than 5 per cent of their assets in energy stocks, are showing more interest in the sector and now account for 77 per cent of the buying.
This suggests oil and gas stocks are no longer the domain of energy-focused investors, but are attracting a broader base.
And lastly, low-turnover funds – which tend to hold stocks relatively long term – are showing more interest in the energy sector now, picking up from some of the high-turnover funds that exited when commodity prices turned weaker in June. That means that the energy sector’s volatility could subside if investors stay put.
So what is the smart money interested in now?
Mr. McCrea found the most popular holdings among 47 energy-focused funds in his analysis had a clear favourite: Tourmaline Oil Corp., which is now held by 83 per cent of the funds, up from 66 per cent at the end of June, 2021.
Arc Resources Ltd. is also very popular. It is held by 62 per cent of energy-focused funds, up from 49 per cent last year. Vermilion Energy Inc., though held by just 30 per cent of funds, is moving up the ranks.
Mr. McCrea approached current bets from another angle as well. He looked at which funds made the most profitable bets on energy stocks in the second quarter, then at where these prescient investors were looking for new opportunities.
The stocks that turned up: Obsidian Energy Ltd., Birchcliff Energy Ltd., Crescent Point Energy Corp. and, again, Vermilion.
These stocks might not be on Mr. Buffett’s radar screen. But the smart money isn’t waiting for his approval.
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David Berman