If you’re suppose to buy when there’s blood in the streets, what action should you take when oil floods trading floors? The recent collapse in oil prices is undoubtedly a major area of interest for the market. Some investors will see the collapse as a buying opportunity, while others will receive reinforcement that commodities should be avoided. Either way, investors might want to take note of Wall Street’s most famous billionaires.
Oil prices in the United States slid 46% last year. That marks the biggest annual decline since the 2008 global financial crisis. Despite reaching as high as $107 per barrel, oil finished 2014 at only $53 per barrel, it’s lowest level in over five years. Reasons given for the plunge include a supply gut amid weak demand and a stronger U.S. dollar.
Energy was one of the top sectors where the largest 50 hedge funds added equity exposure during the third quarter. However, we won’t find out how firms responded to the fourth-quarter collapse until mid-February, when 13-F statements are filed with the Securities & Exchange Commission.
Investors thinking about building a position in energy-related names should keep an eye on the following three stocks receiving attention from billionaires.
1. Exxon Mobil (NYSE:XOM)
If there’s one legendary investor not afraid of declining prices, it’s Warren Buffett. The Oracle of Omaha has been beating the market for decades by ignoring short-term noise and focusing on building long-term wealth. He also holds a major stake in the world’s largest publicly traded international oil company.
Berkshire Hathaway (NYSE:BRK.A) started buying shares of Exxon Mobil in the third quarter of 2013. According to the most recent 13-F statement, Berkshire Hathaway still held 41.1 million shares of the energy giant at the end of September 2014, worth almost $3.9 billion. In fact, Exxon Mobil was one of Buffett’s largest equity positions in 2014. When updated 13-F statements are released next month, it would not be too surprising to see that Berkshire maintained or raised its stake during the fourth quarter, when Exxon Mobil shares reached as low as $86.19.
Exxon Mobil is well off its 52-week high of $104.76 made last summer, but shares managed a small gain in 2014 and currently have a strong dividend yield of almost 3%.
2. BP (NYSE:BP)
Unsurprisingly, people absolutely despise BP in the wake of the disastrous Deepwater Horizon oil spill. BP’s Gulf of Mexico disaster was the worst offshore spill in U.S. history. It began on April 20, 2010, when an undersea well exploded 50 miles off the Louisiana coast, killing 11 workers and spewing millions of barrels of crude oil into the ocean. While shares of BP have lagged the market in recent years, at least one hedge fund superstar believes there is unlocked value.
BP attracted Greenlight Capital Founder David Einhorn in 2013 at an average price of $47.39 per share. He continued to purchase shares throughout 2014 and held a total of 2.06 million shares at the end of September 2014, worth $90.7 million. BP finished 2014 at only $38.12 per share, and has a dividend yield of 6.3%.
“The Deepwater Horizon oil spill was nearly four years ago. Since then, investors have focused on the ensuing legal cases regarding clean-up and restitution efforts, while overlooking BP’s improved return on capital in its core businesses,” said Einhorn in one of his quarterly investment letters. “Allowing for more negative legal outcomes than BP has currently provisioned, we believe the company’s net asset value is nearly $70 per share.”
Ray Dalio from Bridgewater Associates, the largest hedge fund in the world, also increased his modest stake in BP throughout 2014. At the end of September 2014, he held 279,300 shares of BP, worth $12.3 million.
3. Transocean (NYSE:RIG)
One of the world’s largest offshore oil drillers is a cautionary tale for anyone blindly following the moves of billionaires. Carl Icahn is one of the most successful investors on Wall Street, but no one is immune from market volatility. Icahn held 21.48 million shares of Transocean at the end of September 2014, worth $686.65 million. In comparison, the same position at the end December 2013 was worth $1.6 billion.
Shares of Transocean crashed 63% last year, making it the biggest loser in the S&P 500. Despite starting 2014 at $49.42 per share, Transocean finished at only $18.33 per share. Making matters worse, the company suffered from more than just the broad pullback in energy prices. Transocean delayed its third-quarter earnings release, announced a $2.2 billion loss for the quarter, and is a favorite target among short sellers.
Retail investors who are tempted to catch this falling knife should remember that even if a stock is down sharply, you can still lose 100% of your investment. Nonetheless, it will be interesting to see how Icahn manages his position in 2015.
Follow Eric on Twitter @Mr_Eric_WSCS