As the second quarter comes to a wrap-up for the stock market, so do the required 13-F filings for some of Wall Street’s biggest investors. This time around, Warren Buffett’s report card came in due to a shift in markets in one view and direction. Investors would greatly benefit from not blindly following Buffett’s moves but trying to understand his reasoning.
After some controversy in selling out of the technology sector, as up to 50% of Apple Inc. (NASDAQ: AAPL) was cut out of Buffett’s portfolio, and now that he seems to be doubling down on the energy sector through a 29% ownership stake in Occidental Petroleum Co. (NYSE: OXY), the writing is on the wall for what might be in store for the rest of the market in the coming quarters. However, there were two other selections that investors should take into account.
Consumer discretionary names weren’t of preference for Buffett this past quarter, as he sold out of his position in Capital One Financial Co. (NYSE: COF), probably because of the deteriorating state of the consumer credit market today. More than that, Buffett bought into Chubb Limited (NYSE: CB) for additional insurance exposure, a sector known to do well during inflationary times like today’s economy.
All Moves Point to a Single Strategy in Buffett's Latest Bets, Starting with Occidental Petroleum
A bullish view on Occidental Petroleum is also a bullish view on oil prices. Considering that the price per barrel is quoted in dollars, investors could also assume that Buffett is knowingly preparing for a potential weaker dollar ahead, which would make sense considering his other picks.
But, before investors dig deeper for a meaning behind Chubb and Capital One Financial, here’s what Wall Street analysts had to say about Occidental Petroleum stock.
A 33.3% earnings per share (EPS) growth forecast to begin with, justifying Buffett’s pick as a replacement for his reduction in Chevron Co. (NYSE: CVX) only expects 23.9% EPS growth.
More than that, analysts at Scotiabank felt confident enough to place a valuation of up to $80 a share for Occidental Petroleum stock, daring it to rally by as much as 38.6% from where it trades today. This new target would also call for a new 52-week high on the stock, reiterating the bullish outlook for the energy sector.
Tying it all together, analysts at Goldman Sachs reiterated their view for oil prices this year, pushing for as high as $100 a barrel for 2024. Keeping in mind that other dollar-quoted commodities like gold are hitting new all-time highs, it wouldn’t be far from reality to expect similar price action from oil.
Chubb Limited: The Ultimate Inflation-Proof Insurance Stock
Inflation helps businesses like insurance providers, as they can keep up their premiums with the inflation rate plus a margin of gain. Knowing Buffett's view that a weaker dollar is ahead, an insurance pick shouldn't be that surprising.
Besides its inflation coverage, this business is a classic Buffett play, with steadily increasing and predictable cash flows. While it may not be as exciting as an oil name such as Occidental Petroleum, it does show some bullish signs from Wall Street analysts.
Forecasting 8.7% EPS growth is one of many exciting features of this insurance provider. Still, price targets Keefe, Bruyette & Woods set started to point in a better direction.
A $305 a share valuation would call for a net upside of 11.8% from where the stock trades today, meaning a new 52-week high for additional confidence.
Buffett was one of many willing to invest in this stock. As of August 2024, Ameriprise Financial (Chubb's largest shareholder) had boosted its stake in the company by 1.3%. The asset manager's latest move brought its net investment up to $1.3 billion.
Capital One Financial Stock: Buffett's Final Move on the Dollar and Consumer Strength
With a weaker dollar, which can potentially be here, as investors have noticed in Buffett’s latest moves, comes weaker consumer demand. Also, inflation does erode the underlying financials of credit businesses like Capital One Financial. Because dollars are lent out and then repaid later with inflated currency, creditors take a loss on their loans during inflation.
By selling out of this company, Buffett’s view on the dollar couldn’t be more precise. Investors who aren’t yet clear about the potential adverse effects this company will experience during inflation can look to insider trades, notably the CEO’s.
Selling up to 61,532 shares as of August 2024 doesn’t spell confidence for the markets and investors.
Faced with the rise in credit card delinquency rates and collapsing personal savings rates, short sellers have been flocking to Capital One Financial stock during the past quarter, with an increase in short interest of 1.6% in the past month alone.
Considering that markets sent the stock into a discount on a price-to-book (P/B) basis is another confirmation for investors. Trading at a 0.9x versus the finance sector’s average 2.4x valuation signals that markets aren’t willing to pay for this stock, and there must be a reason for that.
