At 92 and 86 years of age, respectively, Warren Buffett and Carl Icahn are two of the greatest living investors -- and both are still at it!
In fact, these two seniors have been quite active this year, especially around oil giant Occidental Petroleum (OXY +1.28%). After Russia's invasion of Ukraine, Icahn sold his stake in the company, which he had held since 2019. On the flip side, Warren Buffett has been buying Occidental shares hand over fist throughout the year, scooping up over 20% of the American oil driller.
So which famous investor is right? Well, Buffett buying from Icahn has actually happened once before, with a small company you may have heard of called Apple (AAPL +1.00%).
Judging from that experience, Buffett could do very, very well with Occidental.
NYSE: BRK.B
Key Data Points
Apple's buyback is a result of Icahn activism
Carl Icahn is what is known as an activist investor. Activists buy shares in a company that is valued cheaply, due to something the investor perceives as a mistake or flaw. An activist usually purchases a meaningful position, then privately and publicly advocates for changes to unlock value.
Icahn took his first position in Apple in late 2013, when Apple was trading rather cheaply and had a ton of cash on its balance sheet. In January 2014, Icahn wrote a letter to the board and met with CEO Tim Cook, advocating that Apple begin returning that cash to shareholders in the form of share repurchases.
Buying back stock at a low valuation can add a lot of value to shareholders, but Apple had hoarded cash even as its iPhone sales grew massively in the early 2010s. That caution stemmed from Apple's more tumultuous past, when it nearly went bankrupt in the late 1990s.
Apple had already begun paying a small dividend, but did eventually implement a large buyback, as Icahn requested, in 2014 and 2015. In 2015, Apple also had a particularly good sales year, a result of its high growth in China. That year also included the introduction of the Apple Watch.
Yet after a boom in 2015, 2016 saw a slowdown, with the volatile China market giving back some its big 2015 gains. Icahn dumped his Apple stake, saying he was "worried about China." But he had already made a $2 billion profit on a $3.2 billion investment.
Buffett swoops in
Of course, that very downturn was when Warren Buffett began buying Apple for Berkshire Hathaway's (BRK.A 0.68%) (BRK.B 0.53%) portfolio. As Buffett watchers know by now, Buffett made even bigger gains than Icahn. Over the five years though 2021, Buffett's investment in Apple went up more than fivefold, and became Buffett's greatest investment in terms of overall dollar returns.
Buffett likely identified Apple not only as a cheap stock amid the pessimism of 2016, but also as a powerful brand with huge customer loyalty. With the smartphone becoming such an important part of people's lives, it was also becoming "expensive real estate." At that time, Apple was also extending its brand to services, charging fees to third-party apps for access to that real estate.
Buffett probably liked the recurring nature of Apple's service and app store fees that it could extract from both iPhone owners and businesses looking to gain access to those masses of affluent consumers.
When you combine that with Apple's newfound improved capital allocation to shareholders, the investment seems like a no-brainer in retrospect.
So while Icahn saw a good but flawed business he could improve and then exit for a quick profit, Buffett likely saw a now-flawlessly run business (after Icahn's fixes) that he could own for the long haul.
Image source: Getty Images.
Is the same thing happening with Occidental?
Turning to Occidental, Icahn bought shares in the company after its expensive $38 billion acquisition of Anadarko Petroleum back in May 2019. Shares plunged, as investors believed Occidental paid too much in a bidding war.
Icahn bought shares, accused management of making a terrible acquisition, and advocated firing CEO Vicki Hollub while demanding seats on the board of directors. When oil prices plunged in March of 2020 as COVID-19 spread, Icahn increased his stake and therefore his heft in the company.
Eventually, Icahn struck a deal, allowing him to put two of his deputies and another hand-picked executive on the board, while also bringing in former CEO Stephen Chazen to become executive chairman. The new board also formed a committee that would oversee any acquisitions, putting a check on Gollub's power, while also exploring a sale of the company to another oil major.
Eventually, the oil market recovered strongly from the pandemic downturn, as demand normalized after a year of big industry supply cuts. When Russia invaded Ukraine, oil spiked, as did Occidental's stock, and Icahn exited the investment with a handsome $1 billion in profits, along with another $500 million gain in Occidental warrants.
Once again, Buffett thinks longer term
While Buffett hasn't spoken much publicly this year on his Occidental buys, he likely has a bullish view of the oil market for the long term, while also appreciating Occidental specifically. Berkshire had already invested in Occidental in 2019 in the form of preferred stock to finance the Anadarko deal, but that was a safer fixed-income investment, albeit with warrants. So Buffett likely got to know management well during that time.
Yet no oil company can do really well without the price of oil and natural gas cooperating, and Buffett probably sees higher prices for longer in the oil market. That's likely for a number of reasons, including years of underinvestment in oil and gas exploration, U.S. shale companies consolidating and controlling their supply growth, and Russia's weaponizing of global energy markets.
In other words, Buffett is betting on a change from low to high oil prices, not dissimilar to the smartphone transitioning from mere gadget to an indispensable part of our daily lives.
Both approaches can win, but nonprofessionals can only play one
As you can see, both investors have different approaches. Icahn identifies cheap companies, then uses his financial heft and reputation to advocate for changes. After such changes are made and the investment improves, he usually exits, using the relatively quick profits to go on to the next special situation.
In contrast, Buffett tries to find quality stocks trading at cheap prices that he can hold for the long term, allowing the miracle of compounding to do its work.
While only institutional investors or incredibly wealthy individuals like Icahn can buy enough stock in a company to be an activist, any investor can attempt Buffett's more Foolish approach of long-term investing in excellent companies. Fortunately for us, that approach also tends to yield even more long-term profits, if done correctly.
But excellent companies don't often go on sale. It's interesting that in the situations of both Apple and Occidental, Icahn was able to improve capital allocation at an otherwise well-run business. Icahn even praised Occidental's land inventory and management's operational capabilities, even while advocating for changes.
Those changes likely made Buffett more comfortable in the compounding ability of each stock, and he probably identified these improvements as more permanent before the market did.
So why doesn't Icahn hold on to his "fixed companies" for the long term, as Buffett does? Icahn appears to idealize the strategy of activism and improving companies, almost irrespective of profit. In order to continue launching new campaigns, Icahn needs to continue recycling his older bets in order to bid for new targets. So Icahn exiting a stock might not mean he feels the stock is now a bad investment, it's just that his work is now done.
We'll see how Occidental fares in the future, but since buying a "fixed up" Apple worked out so well for Buffett last time, you have to like his odds with Occidental -- as long as the thesis of higher oil prices for a longer time proves true.
