It's truly incredible what a difference six months can make for Wall Street. After ending 2022 with their worst full-year returns since the depths of the financial crisis, the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite have come roaring out of the gate this year. With one day of trading left (at the time of this writing) in the first-half of 2023, the Dow, S&P 500, and Nasdaq Composite are respectively higher by 3%, 15%, and 30%.
This optimistic shift on Wall Street certainly isn't lost on its most prominent and successful money managers. Based on Form 13F fillings in mid-May that outline buying and selling activity for the first quarter, billionaires were generally active buyers of equities.
Image source: Getty Images.
But for some billionaire money managers, the buying hasn't stopped. As we head into the second half of 2023, two unexpected stocks are being bought hand over fist by billionaire investors.
Warren Buffett: Occidental Petroleum
Although Berkshire Hathaway's (BRK.A 0.70%)(BRK.B 0.40%) billionaire CEO, Warren Buffett, has overseen approximately $29 billion in net equity sales between Oct. 1, 2022, and April 30, 2023, he and his investment team haven't been shy about adding to Berkshire's ever-growing stake in energy stock Occidental Petroleum (OXY +4.75%).
As of June 28, the Oracle of Omaha's company held 224,129,192 shares of Occidental Petroleum. For context, Berkshire held 211,707,119 shares of Occidental as of March 31, 2023, and has added every single share it owns since the start of 2022.
The logical reason for Warren Buffett and his investment lieutenants, Todd Combs and Ted Weschler, to continue to buy shares of Occidental is the belief that energy commodity prices will be buoyed or head higher. When I say "energy commodities," I'm talking about crude oil and natural gas.
NYSE: OXY
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The thesis behind higher energy commodity prices is twofold. First, there's Russia's invasion of Ukraine, which began in February of last year and has no clear end date. This ongoing war is clouding European energy supply needs.
The other catalyst for higher oil and gas prices is the COVID-19 pandemic, which reduced capital expenditures (capex) from global energy majors for the past three-plus years. Lower capex makes it tougher to quickly increase the supply of oil and natural gas. When the supply of a commodity is tight or constrained, it's not uncommon for the spot price of that commodity to find plenty of support or head higher.
Among integrated energy companies, few generate a higher percentage of their revenue from drilling than Occidental Petroleum. Even though the company does operate chemical plants, which can somewhat hedge crude oil price weakness, Occidental is among the most-sensitive oil stocks with regard to swings in the spot price of West Texas Intermediate (WTI) crude oil. If WTI remains elevated or heads higher, Occidental should enjoy an outsized lift to its operating cash flow.
Something else to consider is that Berkshire Hathaway holds $10 billion worth of Occidental Petroleum preferred stock, as well as warrants to purchase up to 83,858,848 shares at an exercise price of roughly $59.62. It's in Buffett's best interest that Occidental remain at or above this exercise price.
But if there's one thing that's concerning about Occidental Petroleum, it's the company's balance sheet. While a higher average WTI spot price has allowed the company to make significant headway reducing its debt -- a nearly $16 billion net-debt reduction since March 31, 2021 -- net debt still stood at $19.6 billion, as of March 31, 2023. If WTI spot prices were to turn meaningfully lower for an extended period of time, Occidental would likely be in far worse shape than many of its peers. It's an interesting, if not risky, bet from the Oracle of Omaha.
Image source: Goodyear.
Paul Singer: Goodyear Tire & Rubber
Another unexpected stock that's been an exceptionally popular buy heading into the second half of 2023 is tire manufacturer and retailer Goodyear Tire & Rubber (GT 2.27%). Activist investment firm Elliott Investment Management, which is headed by billionaire investor Paul Singer, has taken an approximately 10% stake in Goodyear.
Whereas Warren Buffett is a passive investor who sits back and allows businesses to organically find their way, an activist investor takes a position with the intent of effecting operating or management changes designed to increase shareholder value. Elliott Management and Paul Singer laid out in a letter to Goodyear's board of directors three changes they'd like to see made.
First, Singer and Elliott Management want to appoint five independent directors to Goodyear's board to improve governance and increase investor confidence.
NASDAQ: GT
Key Data Points
Secondly, Elliott Management called for new ways to monetize Goodyear's retail platform. Elliott Management estimates that selling the company's retail stores would increase the company's share price by more than $4 and allow Goodyear to tackle some of its outstanding debt.
The third proposed change is to initiate an operational review. Elliott Management believes this review would result in cost-cutting, as well as freshen Goodyear's growth strategies. All told, Elliott Management believes these three initiatives would more than double Goodyear's share price to $32.
Another catalyst for Goodyear Tire & Rubber that isn't mentioned in Elliott Management's activist letter to the board is the price of rubber. Over the trailing year, rubber costs per kilogram have fallen by 19%. Lower raw material costs, coupled with subsiding inflation, are an all-around positive for Goodyear and should provide a lift to the company's operating margin.
Arguably the biggest concern for Goodyear is the health of the U.S. economy. Tire sales, like vehicles, tend to be highly cyclical. With numerous economic indicators and metrics signaling that a U.S. recession is growing likelier in the not-too-distant future, there's real concern that we could see further slowing in tire demand, even with U.S. inflation rate backing significantly off of its four-decade high.
While I agree with Singer and Elliott Management that Goodyear stock has the potential to drive triple-digit percentage returns from where it is currently, it's going to take time before growing demand and material costs are both working in the company's favor.
