2 Warren Buffett shares to buy Hand Over Fist in September

Warren Buffett has long been a big fan of oil and gas stocks. Over the decades, he has invested billions of dollars in energy firms. The portfolio of his holding company, Berkshire Hathaway (NYSE: BRK.A)(NYSE: BRK.B)is currently betting more than $30 billion on just two oil companies, one of which continues to buy more and more.

Buffett has loved this oil stock for years

Most investors have heard of Chevron (CVX -1.68%). It is one of the largest oil companies in the world. But did you know that Chevron is currently the fifth largest position in Berkshire’s publicly traded portfolio, a position worth about $18.6 billion? Nor is it a new position. Berkshire began buying shares in the fourth quarter of 2020, when they were valued at about $70 per share. But because Buffett’s company has built its position over time, the average entry price is estimated at about $130 per share — just $15 less than the stock’s current price.

Is this your chance to bet on a big Buffett stock without paying a hefty premium?

The first thing to know is that Buffett and Berkshire Hathaway have already made a solid profit from this investment. Since the original purchase, Chevron shares have delivered a total return of nearly 120%. This compares to a total return of just 77% for S&P 500 index in the same period of time. Buffett has repeatedly added to and reduced this position over time, so he has not experienced the full extent of these gains. But Chevron’s valuation has risen considerably since he became interested.

^ SPXTR data by YCharts

In recent weeks, Chevron’s valuation has plummeted. The stock’s total return so far in 2024 lags that of the S&P 500 by nearly 20%. Now could be a great time to get involved. The stock trades at just 14.3 times earnings — a significant discount from the S&P 500’s average valuation of nearly 30 times earnings. While Chevron stock has long traded at a discount to the broader market based on earnings, the stock has rarely traded at this free cash flow yield. The current free cash flow yield is about 7% — nearly double the long-term average. The company has been able to use this excess cash flow to support a hefty 4.5% dividend while also spending more than $3 billion per quarter buying back stock.

CVX Free Cash Flow Yield Data by YCharts

Chevron’s integrated business model and economies of scale make it a great way to bet on long-term fossil fuel demand. If you’re bullish on oil, it’s probably wise to follow Buffett into Chevron. Despite some recent cuts, it remains one of Berkshire’s largest positions.

This is the company that Berkshire is aggressively accumulating

There’s an oil competitor that could soon replace Chevron as Berkshire’s fifth-largest position: Occidental Petroleum (OXY -3.18%). Compared to Chevron, this is a much more complex story. But Buffett is clearly optimistic. Last quarter, Berkshire bought more than 7 million additional shares, bringing the company’s total ownership to 27.3%. The firm received approval to eventually acquire up to 50% of the company, but Buffett denied interest in taking full control of the company.

What does Buffett like so much about Occidental? First, he thinks the business is incredibly well run. After reading every word of the company’s annual report, Buffett told investors that “that’s exactly what I would do” if he were in charge of Occidental. CEO Vicki Hollub, he added, “runs the company the right way.”

But it is more than operational excellence. Although technically an integrated oil business, Occidental is heavily exposed to its upstream segment. This gives the company direct leverage on rising oil prices.

As with Chevron, Western investors need to be bullish on long-term oil prices. Buffett is clearly bullish, and the bet on what he believes are two of the best-run oil operations in the industry is a classic Oracle of Omaha move.