Berkshire initiated a new position in Vitesse Energy (VTS -2.96%) during the first quarter. The oil company offers a dividend yield of over 8%. But does Wall Street think Buffett is dead wrong about this high-yield dividend stock?
Low expectations from Wall Street?
Probably the best way to gauge what analysts think about a given stock is to look at their price targets. They might slap a buy rating on a stock yet still have a target that reflects pessimism.
That’s seemingly the case with Vitesse Energy. None of the three analysts surveyed by Refinitiv in May recommended selling the oil stock. Two of the three rated it as a buy or strong buy, and one analyst rated it as a hold.
However, the average 12-month price target for Vitesse is well below its current share price. Even the most optimistic analyst’s price target doesn’t reflect upside potential for the stock.
I don’t think that Wall Street analysts actually disagree with Buffett about Vitesse, though. The real story with Vitesse is that it’s performed so well so quickly that it’s blown past analysts’ previous price targets. The stock has soared more than 40% over the last five weeks.
Remember, Buffett initiated a position in Vitesse Energy during the first quarter of 2023. That means Berkshire has already received a nice gain from the stock, thanks to its big run in recent weeks.
What Buffett sees in Vitesse
It’s possible that Buffett could decide to sell some of Berkshire’s stake in Vitesse soon. I don’t think he will, though.
For one thing, Vitesse’s valuation still looks attractive. Shares trade at a forward price-to-earnings ratio of 8.5. That’s a lot lower than the average forward earnings multiple of 10.5 for the overall energy sector.
I suspect that Buffett likes Vitesse’s business model. The company owns financial interests in oil and natural gas wells but doesn’t operate those wells. This model helps Vitesse generate strong free cash flow.
Buffett also believes that the oil and gas industry isn’t destined to collapse anytime soon. He told CNBC in April that there could be more oil produced in five years than is produced now.
What about the large amount of money being spent to shift to renewable energy sources? Buffett argued that oil and gas will still be needed. He noted, “You can’t change the world that fast.”
Is Vitesse a good pick for retail investors now?
Vitesse was obviously a great pick for Buffett in retrospect, considering the huge return it’s already generated. But is the stock a good pick for retail investors now? I think so.
I fully expect that the transition to renewable energy will take a toll on the oil and gas industry over the long term. However, I agree with Buffett that the demand for fossil fuels is likely to increase over the next few years.
There’s a pretty good chance that oil prices will increase in the coming months. Saudi Arabia has announced a major oil production cut. The U.S. economy seems to be humming along relatively well with a strong jobs report and inflation moderating somewhat.
Don’t get me wrong: I don’t foresee Vitesse delivering the kind of returns over the next year that it’s generated so far in 2023. I do think that its dividend is sustainable, though. With its fantastic yield, Vitesse looks like a good pick right now for income investors.