FINANCE TODAY | ISSUE NO.15
BUFFETT'S ACTIONS CATCH THE ATTENTION OF INVESTORS ONCE AGAIN
Any individual with a keen interest in finance and investing will eventually come across the name Warren Buffett. Buffett is the owner of Berkshire Hathaway, a multinational conglomerate holdings company based in Omaha, Nebraska which owns many reputable brands such as Duracell and Dairy Queen. Buffett is known as one of the most successful investors of all time. He began to see success in his early 20s, with his first notable accolade being a US$13,000 investment into GEICO stock at age 21. This investment later turned into a mass fortune, allowing him to later own the entire company. Over the years, Buffett has earned his respect and cemented his status as one of investing’s greats, and was appropriately named the Oracle of Omaha. He possesses a strong ability to influence the sentiment of other investors, as indicated by his nickname. Therefore, it comes as no surprise that investors have been paying close attention to his actions in the Canadian equities market. Recently, Buffett decided to sell all of his shares in Restaurant Brands International (RBI). This is a company he has supported for decades, so his sudden departure has left investors puzzled. They also question his decision to continue to hold onto shares in Suncor Energy, which has been doing poorly as of this year. Buffett’s actions have left investors pondering whether or not there is an impending Canadian stock market crash.
RESTAURANT BRANDS INTERNATIONAL - WHY LET GO?
RBI (TSE: QSR) is a Toronto-based multinational fast food holding company, boasting Tim Hortons, Burger King and Popeyes as its subsidiaries. Being a major player in the fast-food industry unfortunately does not make RBI impervious to the effects of COVID-19, as the company experienced heavily disrupted operations during the onset of the pandemic. Its share price during this time had dipped below US$50 for the first time in four years. The share price saw a 48.3% decrease from February to March, amidst government-mandated shutdowns for restaurants and other commercial businesses.
Despite the unprecedented challenges faced due to the pandemic, RBI posted 90% of the prior year’s system-wide sales in Q2 2020 (Liew, 2020). As of October 6th, the stock closed at US$57.56, a 103.8% increase from the US$28.25 low seen in March. The increase indicates that RBI, like many other companies, has almost completely recovered from the low in just a few months. RBI is seeing improvement due to its focus on innovating to create an off-the-premise dining experience, with a little help from the new Popeyes chicken sandwich debuting in Canada to high demand. If RBI’s stock is performing well, then what would make Buffett inclined to sell all of his shares in the company? The most likely answer is the increasingly dire COVID-19 situation in Canada. Cases are reaching peak levels once again, meaning government shutdowns will be reinstated if the curve does not flatten. Buffett has been veering away from businesses that are heavily affected by shutdowns, which allows us to infer that he anticipates the situation in Canada will become worse. Overall, his decision comes down to his lack of faith in the future of quick-service restaurants.
SUNCOR ENERGY - WHY HOLD ON?
Alongside Buffett’s decision to sell all of his RBI shares, investors have also been questioning Buffett’s second major decision to hold onto shares of Suncor Energy amidst their poor performance (TSX: SU). The energy company has been having a historically substandard year, as its share price saw a 59% decrease during the month of March and has yet to recover from this drop. Suncor’s operating loss increased to US$1.49 billion in Q2 2020, following the US$309 million operating loss in Q1 2020. The decrease in both revenue and operating income have caused management to cut dividends paid to shareholders. As Suncor continues to struggle, Buffett remains firm on his decision to hold onto shares of the energy company.
Suncor has incurred losses far greater than that of RBI, with no indication of a recovery anytime soon. What is motivating Buffett to hold onto Suncor shares? Perhaps Buffett sees the oil company as a better value proposition, especially if crude prices rebound (Liew, 2020). Currently, analysts deem Suncor to still be in good financial health, as they have managed to maintain a healthy balance sheet. Despite their cut in dividends, prospective investors see that Suncor is providing dividends of 4.92%, which still lies above the average yield of 1.71% for the S&P 500 index (Liew, 2020). Buffett typically plans his investments to provide him value in the long-term, so he must believe that the energy sector will rebound within the next few years.
SHOULD YOU ABANDON SHIP AND LEAVE THE TSX?
The question remains whether Buffett’s actions are indicative that there will be a Canadian stock market crash in the near future. The chances of the market crashing entirely are unlikely. Despite Buffett’s moves, investor sentiment remains strong as they believe RBI will continue to be successful as it is already one of the best-valued restaurant stocks around. Despite record lows, investors typically agree with Buffett in his belief that Suncor will rebound within the next few years. It is likely that Buffett’s actions are a result of his own needs and requirements for his portfolio rather than fears of a crash.
Examining the TSX, it has rebounded well from the initial onset of COVID-19, reaching just below pre-pandemic levels. The S&P/TSX Composite is currently experiencing a rally led by the industrial and financial sectors, increasing by roughly 147 points. In order for the TSX to suffer a crash, a majority of Canada’s leading sectors would have to be severely hit by the pandemic over the next few months. With the travel and tourism sector essentially being put on hold, other sectors must perform well to average out and avoid a crash. This will ultimately boil down to our collective ability as Canadians to do what we must to flatten the curve. Taking the proper precautionary measures to prevent the spread of the virus will eliminate the need for complete shutdowns, softening the damage that COVID-19 continues to cause to the Canadian economy.
References
Liew, C. (2020, October 05). Warren Buffett: Avoid Canadian Stocks at All Costs? Retrieved October 07, 2020, from https://www.fool.ca/2020/10/05/warren-buffett-avoid-canadian-stocks-at-all-costs/