Do Buffett and Icahn buys signal commodity bottom?

Published Tue, Sep 1 20156:00 AM EDTUpdated Tue, Sep 1 201510:23 AM EDT

Was the 8 percent surge in oil Monday following the disclosure of Warren Buffett buying an energy stock just a coincidence? Most investors think it was just that. However, it is worth debating whether Buffett's 11 percent stake in oil refiner Phillips 66 disclosed Friday, Carl Icahn's purchase of an 8.5 percent stake in mining giant Freeport-McMoRan disclosed Thursday and 8 percent stake in natural gas company Cheniere Energy on Monday will mark a bottom in commodity prices. After all, these legendary investors aren't typically ones to invest into sectors in the middle of a secular declines. But for the most part, traders believe these buys from the legends are not a reason to chase a bottom in oil or copper prices, nor a reason to scoop up all commodity stocks. "Both the Buffett and Icahn purchases seem to be company specific and most likely do not mark the immediate turn in commodity prices to the higher," stated Jeremy Hill, managing partner of Old Blackheath. "Buffett likely sees the fact that a company like Phillips 66 is still able to benefit from the crack spread (higher margins) and the potential for higher refining volumes in years to come should offshore sales eventually be approved." "As for Icahn, it looks like he is more interested in reformulating the corporate element at FCX than calling a commodities bottom," added Hill. Icahn wants to unlock value in Freeport through discussions about "capital expenditures, executive compensation practices and capital structure" with management, stated the filing Phillips 66 is up 10 percent for the year, while the Energy Select Sector SPDR Fund is trading off 16 percent. "I don't think Buffett's purchase of Phillips 66 (PSX) is a vote either way on the commodity. Refiners have been doing just fine while oil has plummeted close to 60 percent in the last year," said David Nelson, chief strategist at Belpointe. "Earnings this year at Phillips will grow almost 24 percent, and it trades at under 12 times this year's earnings. I think Warren understands that oil is lower for longer and is making the safe play." Nelson thinks Freeport-McMoRan is ripe for some corporate activism. The day before Icahn's position was revealed, Freeport-McMoRan was trading at less than five times 2016 earnings estimates and 1.5 times peak cycle earnings in 2011. Read More Four ways to play defense in a falling market "I don't think Mr. Icahn's investment in Freeport is a statement that commodities are about to turn. Freeport is perfect for an activist investor. It has been completely mismanaged by long-time CEO Richard Adkerson, who for my money is the poster child of income inequality in the corporate world. I think Carl's first job will be to get a foothold in the board and force his exit," said Nelson. To be sure, some investors believe this is at least a sign the bleeding has stopped for oil and other commodity prices. "Recent global fund manager sentiment surveys have indicated consensus material underweights in the energy and mining sectors as poor commodity prices have taken their toll on profitability," said Chris Bailey of Financial Orbit, a U.K.-based investment research firm. "I am not surprised that investors of the caliber of Buffett and Icahn have started to look and others will follow. Give it six months and the views expressed by the fund manager sentiment surveys will have started to turn, too. Put it all together, all investors should be scouring the sectors for opportunities." Five out of Icahn's 22 equity positions in his last reported 13F filing are in the energy sector. Buffett has also shown proficiency playing the energy cycle in the past. He bought shares in PetroChina, the Chinese oil company, in April 2003 and made more than five times his investment selling in late 2007 as the price of oil tripled during the time frame. "Both announced positions are classic value plays by two of the most successful investors of our lifetimes," writes Peter Kenny, chief market strategist of the Clearpool Group. "Any improvement in the global economy or domestic economy will pay off significantly for them.... [T]hese investments should inform investors that a likely trough has been or is close to being established" in the sectors. Read More Following huge beat, buy Best Buy? The ultimate example of Warren Buffett investing near a sector's trough was when he bought $5 billion of Goldman Sachs securities in September 2008 during the heart of the financial crisis. Bottom line: It's not a reason to buy oil or copper futures, but it could be an opportunity to buy these stocks or shares of peers with very similar businesses. Disclosure: David Nelson's client portfolios are long PSX.

Workers arrive at Freeport McMoRan's Grasberg mining complex, in Indonesia's remote eastern Papua province.

Olivia Rondonuwu | AFP | Getty Images

Was the 8 percent surge in oil Monday following the disclosure of Warren Buffett buying an energy stock just a coincidence?

Most investors think it was just that.

However, it is worth debating whether Buffett's 11 percent stake in oil refiner Phillips 66 disclosed Friday, Carl Icahn's purchase of an 8.5 percent stake in mining giant Freeport-McMoRan disclosed Thursday and 8 percent stake in natural gas company Cheniere Energy on Monday will mark a bottom in commodity prices.

After all, these legendary investors aren't typically ones to invest into sectors in the middle of a secular declines.