Warren Buffett-led Berkshire Hathaway (BRK.A -0.34%) (BRK.B -0.01%) is known for investing in industry-leading companies and holding positions over time. And although many of Buffett's top picks tend to be traditional, stodgy businesses, there have been recent examples where Buffett and his team have looked for value in other places. The most famous recent Buffett stock is Apple -- which makes up a staggering 46.5% of Berkshire's public equity holdings. But an equally large story has been Berkshire's oil and gas buying spree.
In the span of just a few years, integrated oil and gas titan Chevron (CVX 0.57%) grew to become Berkshire's third-largest public equity position behind Apple and Bank of America as of Dec. 31, 2022. However, Berkshire sold some Chevron in the fourth quarter of 2022. Then it dropped a bomb at its annual meeting when it disclosed it slashed its Chevron stake by 20.8% in the first quarter of 2023, knocking Chevron down to the fifth-largest holding as of March 31, 2022. Factor in a 9.1% decline in Chevron stock in Q1, and Berkshire's overall Chevron position fell from around $30 billion as of the end of Q4 2022 to $21.6 billion as of the end of Q1 2023.
Let's determine if it's time to follow suit and sell Chevron stock or if the stock remains a good buy now.
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The dangers of mimicking renowned investors
Warren Buffett is one of the greatest investors of all time. So, it would make sense to pay close attention to Berkshire's moves and maybe even copy them, right? Yes and no.
If Berkshire holds a large position in a stock, that certainly provides a vote of confidence that the company is a great all-around value. But Berkshire may buy more of a stock, or trim a position, for a number of reasons that have little to do with Berkshire's confidence in the business.
For example, if Berkshire generates a particularly high amount of operating income in a given period, it may use some of that dry powder to add to a position simply because it's a good way to put capital to work. Berkshire does this all the time when it uses extra cash to buy back its own stock. Sure, there are times when a depressed Berkshire stock price may warrant extra stock repurchases. But Berkshire habitually funnels extra profits from its core businesses into other investments.
Trimming Chevron makes sense for Berkshire
Similarly, Berkshire may sell or trim a position for reasons that don't apply to the investment thesis. In the case of Chevron, Berkshire's position reduction seems reasonable. Aside from Apple, Berkshire's top holdings are positions it has owned for several years, if not decades -- like Bank of America, Coca-Cola, and American Express. Put another way, Berkshire staged an uncharacteristic move by aggressively buying Chevron stock in a short period of time.
Possibly the biggest reason for the Chevron position reduction is that the position was abnormally large and quickly paid off. So Berkshire may have just been reducing the position to a more reasonable size.
For context, Berkshire went from owning zero Chevron shares in 2019 to 48.499 million as of year-end 2020, representing 2.5% ownership of Chevron at a cost basis of $40.24 billion. 2020 proved to be a phenomenal time to buy Chevron stock. There were multiple major sell-offs in the stock both in the spring and the fall of 2020. But if you look at the chart below, you can see that Chevron would eventually not only surpass its pre-pandemic highs but also set new all-time highs in 2022.
In 2021, Berkshire finished the year with 38.245 million shares, far fewer than in 2020. However, the cost basis was $34.2 billion, and the market value was $44.88 billion, indicating a sizable gain on the stock. All told, Berkshire's Q1 2023 ending Chevron market value of $21.6 billion is less than half of the end of 2021 market value.
In sum, Berkshire is still heavily invested in Chevron, so its sale should be taken within the context of when it bought the stock and the current position sizing relative to other holdings.
Buying Chevron may make sense for you
Berkshire remains heavily invested in the oil and gas industry through BHE, Chevron, and exploration and production company Occidental Petroleum. Chevron is one of the best all-around oil and gas stocks to buy. It has an inexpensive valuation and a sizable dividend yield with a track record of dividend raises year after year, and the company continues to rake in a boatload of free cash flow to buy back stock.
Rebalancing position sizing is a routine practice that ensures a single stock doesn't become too large of a position. If you bought Chevron in 2020 and the capital gain made the stock a larger weighting than other holdings, it could make sense to sell a bit of Chevron and reinvest in a different stock to get the weightings to where you want them to be. As for investors that own a starting position in Chevron or are looking to buy it, the stock remains a well-rounded buy that provides a nice blend of value and income.
