2 Warren Buffett Stocks to Buy in Fistfuls in September

Warren Buffett has long been a big fan of oil and gas stocks. He has invested billions of dollars in energy companies over the decades. His holding company’s portfolio, Berkshire Hathaway (NYSE:BRK.A)(NYSE:BRK.B)It currently has over $30 billion bet on just two oil companies, and it is steadily buying up shares in one of them.

Buffett has loved these oil stocks for years

Most investors have heard about Chevron (NYSE: CVX). It’s one of the largest oil companies in the world. But did you know that Chevron is now the fifth-largest position in Berkshire’s publicly traded portfolio, worth about $18.6 billion? That’s not a new position either. Berkshire began buying the stock in the fourth quarter of 2020, when it was trading at about $70 a share. But because Buffett’s company has built up its position over time, its average entry price is estimated to be about $130 a share — just $15 less than the current share price.

Is this your chance to place a bet on shares of Buffett’s main company without paying a big premium?

The first thing to know is that Buffett and Berkshire Hathaway have already made a healthy profit on this investment. Since their initial purchase, Chevron shares have delivered a total return of almost 120%. That compares to a total return of just 77% for S&P500 index over the same period. Buffett has added and removed that position multiple times over time, so he hasn’t experienced the full gains. But Chevron’s valuation has risen significantly since he first became interested in it.

^SPXTR data by YCharts

Chevron’s valuation has fallen sharply in recent weeks. The stock’s total return so far in 2024 is trailing the S&P 500 by nearly 20%. Now could be a great time to get involved. The stock is trading at just 14.3 times earnings — a significant discount to the S&P 500’s average valuation of nearly 30 times earnings. While Chevron’s stock has long traded at a discount to the broader market based on earnings, the stock has rarely traded at such a high free cash flow yield. The current free cash flow yield is around 7% — nearly twice the long-term average. The company has been able to use this excess cash flow to support a healthy 4.5% dividend while spending more than $3 billion per quarter on share buybacks.

Cash Flow Data CVX Free Cash Flow YCharts

Chevron’s integrated business model and economies of scale make it a great way to bet on long-term demand for fossil fuels. If you’re bullish on oil, it’s probably wise to follow Buffett into Chevron. Despite its recent trim, it remains one of Berkshire’s biggest positions.

This is a company that Berkshire is aggressively building up

There is one oil competitor that could soon replace Chevron as Berkshire’s fifth-largest stock: Occidental Petroleum (NYSE:OXY). Compared to Chevron, it’s a much more complex story. But Buffett is clearly bullish. Berkshire bought more than 7 million additional shares in the latest quarter, increasing its total stake in the company to 27.3%. The company has received approval to eventually acquire up to 50% of the company, but Buffett has denied he’s interested in taking complete control of the company.

What does Buffett like so much about Occidental? First, he thinks the company is incredibly well-run. After reading every word of the company’s annual report, Buffett told investors that “this is exactly what I would do” if he were Occidental’s boss. CEO Vicki Hollub, he added, “is running the company the right way.”

But it’s more than just operational excellence. While technically an integrated oil business, Occidental has significant exposure to its upstream segment. That gives the company direct leverage to rising oil prices.

As with Chevron, Occidental investors need to be bullish on the long-term price of oil. Buffett is clearly bullish, and betting that he thinks these are the two best-run oil operations in the industry is a classic Oracle of Omaha move.

Is it worth investing $1,000 in Occidental Petroleum right now?

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Ryan Vanzo has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway and Chevron. The Motley Fool recommends Occidental Petroleum. The Motley Fool has a disclosure policy.

Warren Buffett’s 2 Stocks to Buy in Full in September was originally published by The Motley Fool