The Motley Fool: Berkshire Hathaway buys a big chunk of Phillips 66
The Motley Fool Take
Warren Buffett’s company, Berkshire Hathaway, bought $1 billion worth of stock in Phillips 66 (NYSE: PSX) in the past few months, and he now owns about 14 percent of the company. You might want to consider it for your portfolio, too.
Phillips 66, the largest refiner in the U.S. by market share and with a market value recently near $40 billion, is the result of ConocoPhillips spinning off its oil refining business back in 2012.
Why would a midstream and refining giant be appealing in our current environment of low oil prices? Well, because while oil drillers and producers are suffering, refiners are enjoying low feedstock prices and solid gasoline demand that keeps them profitable. Phillips is also investing in future growth, building more pipelines, expanding its storage capacity and constructing a new export terminal in Texas.
Demand for natural gas and products made from it (such as fertilizer, rubbers, plastics and synthetic fabrics) is growing faster than demand for refined products, so Phillips 66’s investments in natural gas pipelines, gathering and processing, along with petrochemical manufacturing, bode well.
Phillips 66’s coffers hold nearly $5 billion in cash, and the stock recently yielded 2.9 percent, with that payout having increased by about 80 percent over the past three years. It’s a cyclical stock, so expect volatility — as well as significant dividend income and likely long-term growth.
Ask the Fool
Q: Is this a good time to buy stocks, with the market having dropped? - N.P., Tucson, Arizona
A: It sure is. Smart investors buy when prices are low, even though many others may be panicking. A struggling economy can offer more stock bargains than one firing on all cylinders - because many stocks get bid up beyond their intrinsic worth during bull markets, while falling below their intrinsic value in bear markets.
Just remember that not all stocks are equally promising. Get to know very well any company you’re considering investing in, since you’ll essentially be buying a piece of it - and its future. Study its annual and quarterly reports, evaluating its debt load, profit margins, free cash flow and growth rates.
Superinvestor Warren Buffett considers the following questions when evaluating stocks: (1) Can I understand the company? (2) Does it have sustainable competitive advantages? (3) Is the management exceptional? (4) Is the price attractive?
There’s rarely a wrong time to buy stocks. You just have to find healthy, growing companies trading at compelling prices.
Q: What does rebalancing a portfolio involve? - M.D., Newark, New Jersey
A: Here’s a simple example: Imagine that three years ago you invested half your nest egg in stocks and half in bonds. If you want to keep that balance, but your stocks have grown to become 65 percent of your portfolio, you might sell some stocks and add to your bond holdings.
Rebalancing means adjusting the percentage of your portfolio represented by various kinds of assets (such as stocks, bonds, cash, etc.) by reallocating your money. Don’t overdo it, though. If your portfolio changes from 50 percent stocks to 52 percent, that’s not yet worth incurring trading costs.
My Dumbest Investment
I fell for the old pump-and-dump scheme on a penny stock. I read unreasonably positive reviews of a high-tech battery company many years ago. I bought near the bottom price and accumulated 5 million shares purchased mostly for a fraction of a penny each.
Once I recover my investment, I am out of it. Yes, I fantasize about the stock moving up to $0.50 per share, which would bring me $2.5 million - it has been to that price and much higher in the past. Yes, I should move the money to a legitimate stock and I may end up doing that, but I am a bit of a gambler deep down, so I probably will hold on to it and keep an eye on it.
I stare at this investment every day in my portfolio to remind myself how dumb I have been. Probably the dumbest part of it is that I’m still invested in it! My 5 million shares were recently worth a total of $2,000. - B.H., Airmont, New York
The Fool responds: Danger, danger! You stand a very good chance of losing whatever is left in this investment. You’re right that you’re really gambling here, not investing. The company is not generating sales and profits, but is burning through cash and selling more and more shares to stay afloat — diluting the value of shares held by people like you. It’s time to sell.