Why Warren Buffett and David Tepper are loading up on energy stocks

Published Thu, Feb 18 20219:57 AM ESTUpdated Mon, Mar 8 20218:02 AM EST

A historic economic comeback is sending some of the world's biggest investors bargain hunting in the unloved energy sector. Warren Buffett's Berkshire Hathaway bought more than 48 million Chevron shares, worth $4.1 billion, last quarter, making the oil name the conglomerate's 10th biggest equity holding. Meanwhile, three energy companies — Energy Transfer , Occidental Petroleum and PG & E — made it into David Tepper's top 12 holdings by the end of 2020, worth more than $800 million combined. "The Chevron bet is a classic Berkshire deep value play and a play on the rebounding economy," Cathy Seifert, a Berkshire analyst at CFRA Research. "If you look at the energy space, it's a laggard, but there's cash flow being generated at these firms." The pivot to the beaten-down cyclical group is paying off. After tumbling 36% in 2020 due to unprecedented demand loss in the pandemic, the energy sector is now the biggest winner among the 11 S & P 500 groupings, rising more than 21% this year so far. Many oil and gas companies are also good income generators, offering attractive dividends. The energy sector yields 4.7%, compared to S & P 500's 1.5% dividend yield. Chevron pays a 5.4% dividend. The renewed interest in energy stocks came after years of underperformance that diminished energy's weighing in the S & P 500 to less than 5%, according to FactSet. The rise of ESG investing and alternative energy, coupled with volatility in oil and natural gas prices, made the energy sector one of the most hated on Wall Street. Still, the industry remains a crucial part of the everyday economy and some believe its swift comeback is a proof of its relevance. "Energy names have certainly not been at the top of everyone's list. The Chevron investment represents going against the grain in that respect," Seifert said. "A lot of us were not expecting the performance in energy in the fourth quarter." Wall Street's quant guru, JPMorgan's Marko Kolanovic, is calling for a "commodity supercycle" starting this year on the back of a rebound in demand as well as increased investor interest. 'All-in bet on the U.S. economy' Berkshire also piled into Verizon , adding 146.7 million shares worth $8.6 billion last quarter. The telecom giant became the conglomerate's sixth biggest holding in its equity portfolio. "It's an all-in bet on the U.S. economy," Bill Smead, CIO of Smead Capital Management, said of Berkshire's new Chevron and Verizon stakes. "He's buying value stocks with fat dividends when people want 20 times revenue fantasy stocks...He's buying 'get rich slowly' stocks." Verizon currently yields 4.4%. Berkshire's newly disclosed positions in Chevron and Verizon would generate approximately $600 million in dividends annually. Meanwhile, Berkshire ramped up its investments in a few drug stocks. It increased its Merck stake by 28% to about $2.3 billion as of Dec. 31, while firming its bets on Bristol-Myers Squibb and AbbVie. These pharmaceutical names are relatively cheap compared to the broader market. Merck is trading about 12 times forward earnings, while Bristol-Myers Squibb has a price to earnings ratio of 8. The S & P 500 is currently trading at 22.5 times forward earnings, which is near the highest level since the dotcom bubble in the last 1990s. Appaloosa's energy bets Tepper's Appaloosa Management made a few big moves in the energy space, including increasing its bet on Energy Transfer and initiated a new position in Occidental Petroleum in the fourth quarter, making them some of the biggest holdings in its portfolio. Meanwhile, Appaloosa still owned a big stake in PG & E after paring the position at the end of last year. The beleaguered utility company was the hedge fund's fifth largest bet with about $528 million worth of shares. In January, Tepper told CNBC's Jim Cramer that he turned more bullish on the market because of the vaccine rollout, and that it's hard to bet against the massive support from the Federal Reserve. "I don't want to say he's wildly bullish. I would say he's very constructive," Cramer said of his conversation with Tepper. "He saw this coming. He knew to get out, and now he feels there are pockets where you should be in, pockets of very reasonable valuations." On Thursday, FirstEnergy received a letter from Icahn Capital on Feb. 16, noting that the billionaire investor intends to snap up a stake in the firm. Carl Icahn said the investment would exceed $184 million but less than $919.9 million of the voting securities of the issuer, according to a filing. — CNBC's Jesse Pound contributed reporting. Subscribe to CNBC PRO for exclusive insights and analysis, and live business day programming from around the world.

A historic economic comeback is sending some of the world's biggest investors bargain hunting in the unloved energy sector.

Warren Buffett's Berkshire Hathaway bought more than 48 million Chevron shares, worth $4.1 billion, last quarter, making the oil name the conglomerate's 10th biggest equity holding. Meanwhile, three energy companies — Energy Transfer, Occidental Petroleum and PG&E— made it into David Tepper's top 12 holdings by the end of 2020, worth more than $800 million combined.