Why Warren Buffett's XOM purchase can affect your portfolio (Part 1 of 2)
Warren Buffett is one of the world’s most prominent names in investing. He has been incredibly successful to date, and he has largely accomplished this success without using complex strategies, but through value investing. Buffett finds companies that he believes are undervalued and invests in them. So when Warren Buffett’s investment company, Berkshire Hathaway, invests in something, the markets pay attention. It often views his purchases as a sort of seal of approval.
On Thursday, November 14, Berkshire Hathaway filed a document with the US Securities and Exchange Commission (the SEC) that showed the company had acquired 40.1 million shares of Exxon Mobil at a value of $3.45 billion. Note that Exxon Mobil has 4.37 billion shares outstanding, so this represents slightly less than 1% of XOM’s equity. However, $3.45 billion on an absolute level is a very sizable investment, and XOM is one of the largest companies in the world, as measured by market cap. Berkshire Hathaway picked up the shares at an average price of ~$86 per share, and currently the stock trades at ~$94 per share. To give some context around when the shares were purchased, another document was filed showing that most of the shares were acquired during 2Q13.
ExxonMobil has largely underperformed its peers and several energy ETFs on a total return basis, year-to-date, past three years, and past five years.
On a total return basis, XOM has lagged its closest comp, Chevron, as well as other oil companies like ConocoPhilipps and Hess Corp. Also, XLE return has lagged behind the returns of major energy ETFs such as the XLE (Energy Select SPDR), VDE (Vanguard Energy ETF), IYE (iShares US Energy ETF), and IXD (iShares Global Energy ETF).
One reason may be because many market participants have been underwhelmed by XOM’s growth prospects. As the largest oil company in the world, XOM has had trouble keeping pace with other smaller energy names in terms of growth. However, the company continues to generate healthy free cash flow (~3% free cash flow yield) and is considered a well-managed, blue chip company—factors that fall in line with Buffett’s historical investment strategy (free cash flow and premier “brands”).
Read on to the next part of this series to see how this news can affect your portfolio.
Browse this series on Market Realist:
- Oil, Gas, & Consumable Fuels
- Warren Buffett
- Berkshire Hathaway
- Exxon Mobil