Warren Buffett and the Canadian investor
It may be a good time to follow the famous investor’s formula, says an analyst who has four Canadian stocks to buy and hold for a long time.
It always seems to get back to Warren Buffett.
It isn’t just the success of this celebrated investor that attracts attention, it’s also his endless quotable wit and wisdom.
“Risk comes from not knowing what you're doing.” Or, “When you combine ignorance and leverage, you get some pretty interesting results.” Or, “I buy expensive suits. They just look cheap on me.”
So why don’t we all invest like Mr. Buffett? Well for one thing, not many of us have the bankroll to invest in companies the way he does.
But that shouldn’t prevent us from following another maxim from the Oracle of Omaha: “Only buy something that you'd be perfectly happy to hold if the market shut down for 10 years.”
And that’s precisely what Ms. Jennifer Dowty has in mind in the latest issue of The MoneyLetter. Examining the market through Mr. Buffett’s eyes, she looks for strong Canadian stocks that fit his buy-and-keep-on-holding philosophy.
She finds four. Here is how she made her choices.
Cash a bad investment
Ms. Dowty scans the markets daily as an executive portfolio manager. And despite the long market rally, she still sees a great deal of caution. Over $100 billion is parked in Canadian money market funds.
This prompted her to think of Mr. Buffett. About a month before Christmas, in an interview with Mr. Charlie Rose on Bloomberg TV, the great investor stated flatly: “Cash is always a bad investment.”
Cash is like oxygen, he continued. You want to be sure it’s there, “but you don’t need to have excessive amounts of it around.”
In short, you should be in the stock market.
And there are incentives for being there, says Ms. Dowty. Both economic conditions and corporate finances have improved.
Still, no one can be sure that the market will sustain its rally through 2010. She turns to another quote from Mr. Buffett’s November interview.
“Things are always uncertain in the short term. What really is certain is that things that worked over time will continue to work over time, so the next day is always uncertain, the next hour is always uncertain, but the longer term is pretty darn certain.”
Not awake nights
No one invests with a longer term in mind than Mr. Buffett. His company, Berkshire Hathaway (NYSE-BRK.A) owns some of the most famous names in the world — American Express, Coca-Cola, Kraft Foods (now the proud owner of Cadbury) and Procter & Gamble.
The shares of Berkshire Hathaway — which are not exactly cheap at $104,655 each — plodded along with a meager three per cent gain last year. Most of the market’s growth was in small caps, commodities and emerging market stocks, not in Berkshire’s blue chips.
This did not keep Mr. Buffett awake nights.
So Ms. Dowty went looking for Canadian companies with the qualities he stresses — slow, steady and still here after twenty years.
The day after that
Not surprisingly, the first stock that appears on her list is a big bank, Royal Bank of Canada (TSX-RY). Royal’s shares increased by more than 50 per cent in 2009. Thus they recaptured most of their previous losses.
They now trade at a reasonable valuation of about 2.5 times book value, notes Ms. Dowty. They offer “a stable, attractive” dividend of $2.00, which yields a comfortable 3.6 per cent.
The company has a double-digit return on equity and the promise of modest earnings growth in 2010. Surveying her fellow analysts, Ms. Dowty finds that their average target prices imply a one-year return of 9 per cent.
The stock trades today at $55.06. But today, of course, is not your concern. It’s tomorrow and the day after that and the day after that ...
Not quite as stable, but perhaps even more attractive, is Research in Motion (TSX-RIM). The BlackBerry maker also saw its share price make an impressive climb in 2009.
Yet it still trades at a very attractive valuation, says the analyst, “given its fantastic growth rate” — just 13 times 2011 earnings estimates.
Yes, the competition has stepped up in the hand-held mobile business. But Research in Motion still dominates the market. Surveying target prices, Ms. Dowty finds that growth of about 28 per cent is expected in 2010.
There’s no dividend yet, and the shares are trading at $68.33.
World leader
The price of oil should continue to make its way up, observes Ms. Dowty in The MoneyLetter. In 2009, it rose 80 per cent. The shares of Suncor Energy (TSX-SU) didn’t match that, but still climbed an impressive 57 per cent.
With Petro-Canada safely in its pocket, Suncor has the country’s biggest oil sands resources, and lots of conventional oil assets as well.
It also has “low-cost production, a strong consolidated management team, healthy balance sheet, attractive cash flow and a strong earnings growth profile.”
Right now, analysts’ estimates are showing only modest growth in the near future, says this analyst. But that should change for the better as it digests all the benefits of the Petro-Can merger.
Suncor trades at $36.45 and yields 1 per cent on its 40¢ dividend.
Completing this list is just the kind of world leader Mr. Buffett seeks out. SNC Lavalin Group (TSX-SNC) is one of the largest engineering firms in the world, working in over 100 countries.
It also has a basket of big projects in Canada (like the Sea to Sky Highway that will carry people to the Olympic games next month). Infrastructure spending has been an obvious boon for this company.
The company’s small quarterly dividend ($0.60) yields about 1.1 per cent now, Ms Dowty says, but it has room to increase when 2009 results are announced in March.
She and other analysts see only modest growth for the share price in the near future, perhaps hitting a ceiling at around $60. That gives it a bit of room to move from its current level of $52.87.
But the near future is not your concern with stocks like these. As one of the most famous of all Buffett quotes has it: “Our favorite holding period is forever.”
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