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Buffett Was Right to Dump His Occidental Petroleum Shares

About a month ago, I gave a strong sell signal on shale-oil company Occidental  Petroleum  (NYSE:OXY). At that time, I suggested that it wasn’t a good time to drill for profits in OXY stock.

A magnifying glass zooms in on the Occidental Petroleum (OXY) website.
Source: Pavel Kapysh /

Not to toot my own horn, but hopefully people read that article and sold their OXY stock shares or simply didn’t buy them. Otherwise, they would have sustained significant share-price losses with little hope of a recovery.

A few days after that article was published here on InvestorPlace, it was revealed that Berkshire Hathaway (NYSE:BRK.A, NYSE:BRK.B) CEO and legendary investor Warren Buffett made some noteworthy purchases and sales recently.

Understandably, precious-metals enthusiasts focused on Berkshire’s new long position in mining giant Barrick Gold (NYSE:GOLD). That’s certainly newsworthy, but there’s another trade that Buffett’s company made that’s equally important.

That trade has, for the most part, flown under the radar in the financial social media. Investors in general, and OXY stock holders in particular, should pay close attention as Berkshire’s allocation shift could be a loud and clear signal to sell your shares.

A Closer Look at OXY Stock

In March of 2018, OXY stock was sitting pretty at $84 and change. It was a simpler time when hopes ran high in the Permian Basin and shale oil was thriving.

Alas, those days are little more than a distant memory now. April 2020’s oil shock hit American shale firms like Occidental Petroleum like an 18-wheel truck.

It was like a one-two punch in April as West Texas Intermediate oil futures contracts touched negative $37 per barrel while the novel coronavirus decimated the demand for energy products.

OXY stock bulls are still waiting for a recovery that hasn’t happened. The stock closed at $10 and change on Sept. 11 and the multi-month trajectory was clearly to the downside. Sadly, the bulls lack morale or motivation. Is a turnaround even possible at this point?

A Cold Rejection

Sometimes, it seems, legendary investors must be ice-cold in cutting their losing trades short. When an investment goes wrong, there are times when it’s entirely appropriate to simply dump the shares for a loss and move on to something else.

Even a great investor like Buffett makes losing trades from time to time. Part of the Oracle of Omaha’s success comes from knowing when to admit he’s wrong and change his strategy.

Granted, Buffett didn’t verbally admit that he was wrong in holding OXY stock. But then, a U.S. Securities and Exchange Commission 13-F filing basically said it on Buffett’s behalf.

By the end of the first quarter, Berkshire Hathaway sold all of its 18.9 million shares of OXY stock. Consider the implications here. Selling shares after a price run-up could be interpreted as profit taking.

Obviously, there was no run-up in OXY stock. One might conclude, therefore, that Buffett just wanted to distance himself from a poor performer.

The Well Runs Dry

It’s not difficult to find reasons why Berkshire sold its entire position in OXY stock. For one thing, Buffett likes dividend-paying stocks. OXY’s annual forward dividend yield is a mere 0.36%, so that well has practically run dry.

Buffett is also known as a value-focused investor. And frankly, there’s not much value left in OXY stock. Buffett himself once observed that price is what you pay but value is what you get.

OXY is certainly low in price, but where’s the value in the company? In terms of earnings, you won’t find much there. Indeed, OXY stock’s trailing 12-month earnings per share comes to an unsettling negative $14.45.

By one calculation, Occidental Petroleum would need to spend almost $3 billion next year in order to sustain production, and that’s assuming WTI oil stays at $40 per barrel. Plus, that calculation assumes a number of asset sales and cost reductions.

As far as I can discern, Buffett doesn’t like to invest based on assumptions. So, we can’t really blame him from letting go of his OXY shares.

The Bottom Line

I’m certainly not suggesting that anyone should sell OXY stock simply because Buffett sold his shares.

On the other hand, it’s not hard to see why Berkshire Hathaway doesn’t own OXY stock anymore. And if you own it, then following Buffett’s lead might not be a bad idea.

On the date of publication, David Moadel did not have (either directly or indirectly) any positions in the securities mentioned in this article.

David Moadel has provided compelling content and crossed the occasional line on behalf of Crush the Street, Market Realist, TalkMarkets, Finom Group, Benzinga, and (of course) He also serves as the chief analyst and market researcher for Portfolio Wealth Global and hosts the popular financial YouTube channel Looking at the Markets.

Article printed from InvestorPlace Media,

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