Value investors are always keeping their eyes peeled for potential opportunities in undervalued stocks. Being successful in this endeavor requires more than mere number crunching, however; it demands understanding of a company's real worth beyond its market price.
Of the many investors who have sought to master the strategy, Warren Buffett (Trades, Portfolio) is considered to be one of the best. As such, finding these hidden treasures, particularly those the Berkshire Hathaway (BKR.A) (BRK.B, Financial) leader favors, can significantly amplify your portfolio's potential.
Buffett's approach
Known as the "Oracle of Omaha," Buffett rigorously evaluates a company's financial health and intrinsic value, patiently awaiting the market's mispricing before stepping in. Though market dynamics may occasionally cast a negative shadow on these stocks, pushing them further beneath the radar, savvy investors view this as an opportunity, not a setback. They capitalize on these moments to buy valuable stocks at discounted prices.
However, the strategy is not for everyone. It requires patience, courage and a discerning eye. This journey, filled with potential pitfalls, exciting discoveries and rich rewards, offers the joy of seeing your portfolio flourish over time. Undervalued Buffett stocks, therefore, exemplify the very essence of value investing—spotting the diamonds in the rough that can ultimately shine brighter.
To assist me in this endeavor, I utilized the All-in-One Screener. The Premium feature, courtesy of GuruFocus, offers the most recent insights to expedite my analysis. Among Buffett's current holdings, it found two undervalued stocks in the energy sector.
Occidental Petroleum
Occidental Petroleum Corp. (OXY, Financial), an integral player in the oil and gas industry, has been the center of attention for some time due to Buffett's continuous investments. Despite the promising market dynamics, its year-to-date return sits at a less-than-appealing 3%, underscored by an upward trend in crude oil prices and strategic production cuts by influential oil-producing nations. A dive into the company's financials reveals a mixed bag, marred by a downturn in several key metrics.
The energy giant's most recent earnings announcement was disappointing. Revenue for the three months ended March 31 came in at $7.22 billion, reflecting a year-over-year contraction of 13.46%, while net income plunged an alarming 74.1% to $1.26 billion. The diluted earnings per share, a crucial gauge for investors, did not fare much better, shrinking by 78.49% and missing estimates by 14.39%. Operating income fell 38.92%.
Amid this financial storm, however, several silver linings gleam.
First, Buffett's Berkshire Hathaway, famed for its value investing acumen, recently expanded its Occidental stake to a notable 25%, signaling potential hidden value in the stock. The sector-wide optimism fueled by energy producers ascending the S&P leaderboard is a further bolster to its prospects.
Moreover, Occidental Petroleum is an appealing choice in the oil and gas sector due to its positive valuation metrics. For instance, the company's price-earnings ratio, a key indicator of value, has shown promising trends over the past decade. The current earnings multiple of 7.22 is below the industry median of 8.37, making it relatively affordable for potential investors.
Further, the ratio outperforms 55.08% of its peers, showcasing its efficiency, profitability and strong management. This competitive advantage underscores Occidental Petroleum's ability to generate shareholder value and highlights its robust position in a competitive market.
With its expansive footprint, Occidental is uniquely positioned to capitalize on rising oil prices. Navigating the stormy seas of the energy market, the stock remains a good potential candidate for discerning value investors.
Chevron
Another potential opportunity is Chevron Corp. (CVX, Financial). The energy giant may have seen a dip recently with a year-to-date return of -7%, yet it should not be dismissed. A more in-depth look into the company's recent financial performance reveals a compelling narrative of growth and resilience.
In the first quarter, its net income grew 5.03% year over year. The company also recorded an upswing in its diluted earnings per share, boasting an increase of 7.4%.
But the real excitement occurred when Chevron posted its second-quarter earnings. Not only did the company surpass market expectations, but it also beat them by a solid 3.52%, furthering its credibility in the market. This was not a standalone incident, but a testament to its strong leadership.
Chevron's expansion and activities in the lucrative Permian Basin only fan the flame. The company's involvement in this resource-rich region helps consolidate its position in the energy sector and amplifies its potential for long-term growth.
Further, the company has maintained a stable and reasonable valuation over the last 10 years, as evidenced by its price-earnings ratio. The ratio has ranged from 8.17 to 148.09, with a median of 15.32. Currently, the earnings multiple is 8.73, indicating the stock is attractively priced. This consistent and favorable valuation suggests Chevron could be an appealing investment opportunity for those seeking reliability and potential rewards in the oil and gas sector.
When all these elements are brought together, they speak volumes of the company's ability to ride out the volatile waves of the energy market and further cements the energy behemoth's status as one of the top value stocks to consider.
In essence, Chevron's story makes it a compelling asset for the discerning investor's portfolio, particularly those who follow the principles of long-term, value-oriented investing.
