Tracking a Buffett Energy Bet

Nicholas Vardy

Nicholas Vardy has a unique background that has proven his knack for making money in different markets around the world.

Global stock markets recorded their first positive week in 2016, with the Dow Jones up 0.66%, the S&P 500 gaining 1.41% and the NASDAQ jumping 2.29%. The MSCI Emerging Markets Index recovered a solid 3.08%.

This week’s Bull Market Alert recommendation is a bet both on an eventually rebounding energy sector and one of Warren Buffett’s highest-profile publicly traded investments.

Phillips 66 (PSX), a name you may recognize from the company’s branded gasoline stations, spun-off from ConocoPhillips in 2012.

Here’s why I think Phillips 66 is set to rally after its recent sell-off.

First, Phillips 66 operates as an energy manufacturing and logistics company. As such, Phillips 66 has less exposure to the plummeting retail price of gas than other energy companies. Still, typical of the “baby out with the bathwater” behavior of investors, the stock has been (unjustly) dragged down in the sell-off in the energy sector. Today, the entire energy sector is weighed down by low crude oil and natural gas prices. But Buffett is clearly betting that the energy sector won’t be wiped off the map.

Second, Phillips 66 is one of Buffett’s biggest publicly traded conviction bets in recent memory. Buffett increased his position in Phillips 66 substantially in 2015, buying around 22.1 million shares in the second quarter of 2015. He boosted his holdings in PSX further in the third quarter of 2015 to 61.4 million shares with a market value of $4.7 billion. Buffett now owns a whopping 11.5% of the company.

And with the stock off almost 20% from its November highs of $94, Buffet was busy buying Phillips 66 stock last week, sinking at least $177.3 million into the stock at prices between $74.33 and $80.08.

By buying Phillips 66, Buffett is following his time-honored advice to “be greedy when others are fearful, and fearful when others are greedy.”

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I recommend you do the same.

Buy Phillips 66 (PSX) at market today, and place your stop at $65.00.

If you want to play the options, I recommend the March $80 calls (PSX160318C00080000), which last traded at $3.80 and expire on March 18.

Portfolio Update

Direxion Daily CSI 300 China A Share Bear ETF (CHAD) fell 3.94% for its first week in the Bull Market Alert portfolio. This short position capitalizes on the recent weakness in the Chinese domestic market and has soared since the beginning of 2016. Weakness in the Chinese economy is systemic, to a point, and will likely continue for quite some time — and CHAD is just the vehicle to deliver profits from this situation. CHAD is a BUY.

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Nicholas Vardy

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