Monday, August 3, 2015

The right way to ride Buffett's coattails

It isn't often that we get to participate in buying stocks at the levels that Warren Buffett's Berkshire Hathaway bought them at. Most of the time, the public finds out in regulatory filings after the fact and the stocks have already moved up. Here is one exception that I discovered.

In August 2013, Berkshire disclosed that it had invested about $500 million in Suncor Energy (SU) (CNN). The Street got excited because it had also made an investment in ExxonMobil (XOM). Fast forward to February 2015. Berkshire sold its XOM stake but added to its SU position (via CBC).

In the chart below, I have marked the zones when Berkshire bought its SU stake below. Last night`s closing price of USD 27.66 is right about where Buffett had bought his positions. In other words, you and I can buy SU now at roughly the same price as Buffet bought his stake.

Last week, Suncor Energy report its financial results and earnings were above Street expectations. Not only that, it raised its dividend and reinstated its share buyback program. The company has a healthy balance sheet and it is one of the more conservatively capitalized companies in the Canadian oil patch. The dividend yield is just slightly north of 3%.

While I recognize that oil and oil stocks are nosediving, this is the chance to pick up a stock at a level that Buffett bought in at. Opportunities like that don't come around too often.

Is this investment idea contrarian enough for you?

Disclosure: I have no positions in Suncor, but I may initiate a position depending on how negative the feedback is. So please, either comment at the end of this post, email me at cam at hbhinvestments dot com or tweet me at @humblestudent. Tell me what a stupid idea this is, how SU is a value trap and what an idiot Warren Buffett is to be holding energy stocks when it was obvious that oil prices would be tanking.


RAS said...

Actually, I think it could be a pretty good idea if you are willing to hang in there for a couple of years. I saw a guy on Fox Business News today who said that the output of fracked wells typically drops off rapidly after 3-4 years. If that's so, and I think verifying his statement is key, You might expect US production to take a dive in a couple more years, making Canadian tar sands worth a lot more. So, it might work out pretty well. Also, you've got to think that if WB owns it, there's got to be a good reason. He wouldn't be holding on to it if he thought it was a bad investment. If that was the case, it would be gone, just like XOM.

RAS said...

This article seems to confirm the drop off:
But I wonder if a well can be re-fracked and production restored?

Cam Hui, CFA said...

Yes, you are correct. The depletion rates on tight oil and gas formations are horrendously high and they do drop off very quickly.

Suncor is more known for its heavy oil assets. As well, they have a fair amount of downstream refining assets when they merged with PetroCanada.

walt said...

"heavy oil assets"
The current global price of oil is depressed by the frackings, and to a lesser extent by conversions to natural gas. The return of Iran to the market may also be a short-term depressor, but everything else is more expensive.

XOM was very profitable at $100/barrel, but they were eating away their reserves. WB will stick with SU as long the market overprices its assets as it did XOM's. He has made fortunes patiently waiting for the market to be wrong.

RAS said...

S&P rates the stock 4 stars on a 5 star scale, a buy, and gives the stock a B+ quality rating, which is pretty good. They have a one year $34 price target, which is the lowest I saw. They also project a 17% annual revenue decline over the next 3 years, which was the biggest negative I saw. Raymond James has a $43 price target. Goldman, UBS and Nomura recently initiated coverage with buy recommendations. According to Yahoo, the mean recommendation is 2.3, with 1 being a strong buy, and 5 being a sell. Based on 10 opinions the mean target price is $43.93, the median is $44, the high estimate is $48 and the low is $40. Assuming you could buy it at $27.65US and sold it for $40US a year later (the low Yahoo estimate), that would be a ~44% gain. Even at a $34 sales price (the S&P estimate, which seems very low compared to the consensus) you'd have a gain of ~23%, still not too shabby. And, you'd pick up another 3.19% in dividends, for a total return in the range of 26-48%, based on the lowest estimates from S&P and Yahoo. So, I think you can make the buy case based on the published estimates.

But, all that said, I also think you may have to hold on through several bad years to see a good return because of the current overvaluation of the markets, which will correct at some point in time. My own thought is to have a trader's mindset until the correction and wait to pick up investment securities like SU at more reasonable prices. But, then I ask myself, "Are you smarter than Warren?" The answer is quite obvious. He knows as well, or better, than I do that a correction is in the offing, but he buys SU anyway.

Anonymous said...

This is Buffett's 23rd largest position, and around $700mm. Back in the day, anything less than $1.5bn was not Buffett, it was Lou Simpson. I am guessing the same here (though no longer Lou calling the smaller investment shots).

Anonymous said...

I meant Berkshire Hathaway's 23rd largest position.

walt said...

"But, then I ask myself, "Are you smarter than Warren?" The answer is quite obvious. He knows as well, or better, than I do that a correction is in the offing, but he buys SU anyway."

Cam, you have your inner trader nagging constantly, but WB knows the difficulty of catching a bottom.

pouncencapture said...

Isn't it possible that Warren has sold SU since the last regulatory filing?

Cam Hui, CFA said...

Pouncencapture - Or BRK could have bought more, which is probably more likely.