By Barry Schwartz
What if you could buy a business that you knew would be in operation for at least 30 years at its current rate? What if the business was being valued at less than half it was five years ago, even though its cash flow and dividend have more than doubled? And, what if you could buy a business where its product is needed every day and the demand for its product will most likely grow over time? Finally, what if that investment was endorsed by the world's greatest investor? Would you call that a "no brainer" investment? I would.
On August 19, 2008, the Calgary Herald announced that Warren Buffett and Bill Gates had a secret tour of the oil sands facility owned by Canadian Natural Resources and then flew over the oil sands in a helicopter. When interviewed on CNBC a couple of days later, here's what Warren had to say about his trip to the oil sands:
"I'm always interested in understanding the math of things and understanding as much as I can about all aspects of business. And what I learn today may be useful to me two years from now. I mean, if I understand the tar stands today and oil prices change or whatever may happen, I've got that filed away and I can - I can use it at some later date. And that's really the wonderful thing about investments is your knowledge is cumulative."
The interviewer then asked: "But you are not actively looking right now to invest in any of these companies?"
"Do I have a buy order this morning? The answer's no," said Mr. Buffett.
And who would have blamed him. Trading at $60 a share, Suncor (NYSE:SU) was priced at well over 10 times its cash flow. At these levels, the company was priced for perfection, even with oil trading well above $100 a barrel. No question Warren was impressed by the oil sands tour. Compared to other oil companies, oil sands are a low risk proposition. No need to find or drill for oil, with the oil sands it's all there for the eye to see. So Warren did what he does best. He filed away this information and then did what famed investor Jesse Livemore said: "the big money is made in the waiting."
As we know too well, the 2008 crisis hit, the price of oil cratered, and Suncor's stock preceded to plunge more than half to the mid-$20 range. Even though oil recovered back to $90 by 2012 and even though Suncor's cash flow more than doubled from its 2008 level, its stock went dormant around $30.
Trading at less than five times cash flow with oil sands reserves of more than 30 years, Suncor is a "no brainer" investment. While Suncor was once rewarded with a premium multiple for having more than three times the reserves of other large capitalized oil companies, it now trades at a deep discount.
The lessons of Warren's investment in Suncor are quite clear. Look for good quality companies that sell products and services that people use every day which are trading at reasonable valuations. Then wait for your opportunity to buy it at a price so attractive to its value that you don't need your brain to help you make a decision.
Disclosure: Clients of Baskin Financial own shares in Suncor.