Toward the end of last year, we learned that Warren Buffett (Trades, Portfolio)'s Berkshire Hathaway (BRK.A, Financial) (BRK.B, Financial) had been buying shares of oil giant Chevron Corp. (CVX, Financial) during the second half of 2021.
At the end of December, the company owned a 2.5% stake in the oil and gas company worth $4.1 billion. It later emerged that Berkshire began buying Chevron shares in the third quarter of 2020. It secured regulatory permission to not include the stock in its 13-F portfolio update for that period, as it was still building the position.
Overall, the group purchased 44.3 million Chevron shares in the third quarter and another 4.2 million shares in the fourth quarter. When Berkshire was finished buying, the oil giant ranked among its 10 most significant holdings by market value at the end of 2020.
The fact that it became a top 10 position and was worth more than $4 billion at the end of 2020 suggests it was the Oracle of Omaha himself who was behind the trade.
Buffett has shared previously that his portfolio managers, Todd Combs and Ted Weschler, have a high level of freedom choosing positions for the portfolio at the sub-billion-dollar level. But above that, Buffett gets involved. When the stock is going to become a top 10 holding, I don't think it's unreasonable to say he would have to have some significant input.
With that being the case, it's fascinating to see that Berkshire was busy selling at least half of its Chevron holding in the first quarter of 2021. Buffett reduced the holding by 51% to 23.7 million shares in the first three months of the year after holding the stock for less than nine months.
I would not be surprised if Buffett has continued to sell this holding, and Berkshire reports yet another decline in its holdings of the stock in its second-quarter 13F report. A drop of more than 50% in the quarter indicates Berkshire is selling out of the holding, rather than adjusting its positioning.
The big question is, why did Buffett buy and then sell Chevron? For an investor that has spent so much time talking about the benefits of buy and hold long-term investing, this is not long-term investing. If anything, it looks like a short-term trade.
Between the end of the third quarter last year and the end of the first quarter of 2021, shares in Chevron added 22%, which implies a total profit of $900 million on Berkshire's trade. Of course, these are only rough estimates as we don't know the actual purchase and sale prices.
Three reasons
I don't want to put words in Buffett's mouth, but I can see three reasons why the Oracle of Omaha bought Chevron in the first place.
Buffett has a history of buying shares to gain a better understanding of the company and the industry it operates within. Considering Berkshire's existing investment in Occidental Petroleum Corp. (OXY, Financial), it could make sense that the group wanted to gain a deeper understanding of how the oil industry worked and Occidental's competitors.
Another possibility is that Buffett may have wanted to own the stock for a long time, but he just changed his mind. When we consider the fact that the company has a 5% dividend yield and may have been undervalued in the third quarter of last year, it could have presented an excellent opportunity to invest cash at an attractive rate of return when there were a few other options on the market.
The final possibility is that Buffett just thought he could make a quick trade. He's done this before and may do it again. If he believed Chevron was undervalued and thought Berkshire would earn a return, it is reasonable to say he may have decided to take a quick trade.
Disclosure: The author owns no stocks mentioned.
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