If investors want a friend, they shouldn’t look to Warren Buffett for help. Still, off and on the OXY stock price chart, a very doggish Occidental Petroleum (NYSE:OXY) may be ready to fetch calculated, risk-adjusted stock profits right here, right now.
For some, the actions of celebrated money managers can be as important as business fundamentals when it comes to evaluating a stock. They didn’t get there by accident, right?
And in the world of value investing, none are bigger than Warren Buffett and Berkshire Hathaway (NYSE:BRK.A). But based on recent action, oil and gas producer OXY doesn’t even appear fit for the doghouse.
This past month it was revealed the Oracle of Omaha unloaded the firm’s entire common stock position in Occidental during the second quarter. That can’t be good, right?
Maybe. The thing is, Berkshire Hathaway accumulated nearly 19 million in shares, due to a 2019 deal for $10 billion in preferred OXY shares, negotiated to help the energy company make an incredibly ill-timed acquisition of rival Anadarko Petroleum.
To state the obvious, Buffett’s move to unload the firm’s entire OXY common stock position certainly isn’t a vote of confidence. But it’s no death sentence either. Moreover, the decision runs deeper than, ‘Warren likes Apple (NASDAQ:AAPL) or Warren doesn’t like Delta (NYSE:DAL)’ because of his view the world has changed.
Bottom-line, with continued exposure vis-à-vis its advantaged preferred stock position and Berkshire likely answering to aggravated shareholders amid the firm’s coronavirus-related investing missteps following 2019’s underwhelming performance, following the Oracle’s lead in OXY as an investment to buy or sell makes less sense than it might have in years past.
OXY Stock Weekly Chart
Source: Charts by TradingView
To be fair, Occidental Petroleum isn’t without problems. The industry is bad, but OXY also faces more challenging debt issues than peers Exxon Mobil (NYSE:XOM) or Chevron (NYSE:CVX) whose balance sheets are better prepared to weather continued pressure on fossil fuel producers. But as InvestorPlace’s Mark Hake evenly explains, the pros for not panicking are evident. And now the benefits for owning OXY look even better on the price chart.
Since Mark’s tire-kicking of Occidental’s fundamentals, shares have confirmed a higher-low double bottoming pattern. The provided weekly chart shows the bullish development. The price action also reflects a supportive stochastics setup which shows a diverging crossover pattern out of oversold territory.
All told, today’s investors have an opportunity to buy into OXY stock as discounted fundamentals are supported by a technical bottom which appears playable.
For investors that are agreeable with what’s been discussed, rather than purchasing shares I’d recommend a slightly out-of-the-money, intermediate-term bull call spread. The November $13 / $15 combination looks about right.
So why a vertical? One worry is Occidental has already broken its 2008 low. That relative weakness, as well as the recent failure in shares to reclaim technical support treading lightly. A vertical of this kind, rather than owning stock, helps manage risk.
A bull call spread also makes sense as OXY stock investors aren’t getting paid to own shares, unless you think a quarterly $0.01 payout is a big deal. Lastly and as a more volatile stock, a vertical’s defined and reduced risk offer a stronger way to leverage profits if a bottom takes hold, without the worry of deleveraging should a meaningful low prove elusive.
On the date of publication, Chris Tyler did not hold, directly or indirectly, positions in any of the securities mentioned in this article.
Chris Tyler is a former floor-based, derivatives market maker on the American and Pacific exchanges. The information offered is based on his professional experience but strictly intended for educational purposes only. Any use of this information is 100% the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT and StockTwits.