While many contrarian investors are predicting a correction in the red-hot energy sector soon, the legendary Warren Buffett laid a bet that the streak will go on.
Buffett's holding company,
, revealed a 17.9 million-share stake in
in its quarterly regulatory filing on Monday. The investment comes from the world's preeminent value investor, even after shares of the oil company have rocketed 13% so far this year, after adding a whopping 52% last year.
"I doubt that
Buffett thinks ConocoPhillips is a screamingly cheap company," says Glenn Tongue, managing partner with T2 Partners. "He probably thinks it's a predictable asset-rich company that will grow in value far in excess of what his costs of financing are. That rationale goes along with some of Berkshire's previous investments like
Berkshire also disclosed new positions in
United Parcel Service
, both of which fit Buffett's philosophy of buying stable businesses that are industry leaders.
The ConocoPhillips stake also fits Buffett's game plan. He has experience in the energy sector, having made high returns by investing in
, and he has long said publicly that he views energy as an attractive area.
Still, the move seems bound to raise some eyebrows, particularly after Buffett's longtime sidekick, Charles Munger, made some controversial comments at the recent
conference. He suggested that future generations will curse present-day Americans for consuming fossil fuels at such a high rate, since the supply of oil will be greatly diminished.
"Those were pretty strong words," says Tongue's partner at T2 Capital, Whitney Tilson. "You rarely see Buffett and Munger investing in something that's just had its biggest run in history in the last five years,
like the oil and gas market. One reason may be that they believe oil prices are going to be high, if not higher, for a long time."
Another reason for the investment, says Tilson, could be an attempt to hedge against Berkshire's other holdings that are heavily dependent on consumer spending, like
. If those positions were hurt as consumers struggle under the weight of rising fuel prices, investments in the energy market could offset those losses.
Berkshire recently announced plans to buy 80% of Israel's
. At its May 6 annual meeting, Buffett said he would like to cut Berkshire's cash stake, which recently totaled $42.86 billion, to about $10 billion.
"Conoco makes up a very small percentage of Berkshire's overall portfolio, so people probably shouldn't read too much into it," says Tongue.