Legendary investor Warren Buffett personally picks the stocks for his conglomerate, Berkshire Hathaway. He mainly looks for companies that can provide investments of long-term value. When you look at Berkshire’s portfolio, you see that the investments are more concentrated than diversified.
Buffett has invested in several industries, although there are stocks that belong in the same sector.
In the energy sector, the value-conscious investor own shares of Phillips 66 and the Canadian oil and gas company, Suncor (TSX:SU)(NYSE:SU). Today, Buffett holds more shares of Suncor which is valued at US$307,893,960.
I know Berkshire first bought Suncor stocks in 2012, and sold them in 2016. For Buffett to return in 2018 to invest in Suncor a second time, however, is a positive sign. Suncor’s inclusion in Buffett’s stock portfolio has boosted the energy company and given it prominence.
You should invest in a particular stock because of the company’s performance rather than its popularity. Buffett took a second serving because Suncor offered long-term value potential.
Vote of confidence
Buffett is a patient man. If he has confidence in a company, he will hold the stock longer. In the case of Suncor, he lost confidence and took a profit when he sold his shares. Two years later, he realized his mistake and changed his mind.
Suncor is Canada’s second-largest oil and gas producer and continues to deliver a stable performance despite some weakness in the sector. Q2 2019 showed a 5% increase in operating profit, and a rise in upstream production.
Operating profit rose to $1.25 billion from $1.19 billion compared to the same period last year. Net profit climbed to $2.7 billion from $972 million a year ago.
Suncor also registered a record total production of the equivalent of 803,900 barrels of oil per day (boepd) during the quarter — a 21% increase on the previous year’s total volume.
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Best upside potential
Warren Buffett made the right decision to revisit and reinvest in Suncor. Market analysts expect the earnings of integrated energy companies to fall this year due to the volatility of oil prices.
But they believe the business segments of the Canadian energy giant can support earnings despite this volatility.
Because of the reliability of Suncor’s assets and its expanding upstream volume, the company’s earnings could rise by 24% in 2019. Thus, analysts also see Suncor as having the best upside potential in comparison to its industry peers.
Given the scenario of rising earnings and cash flow, the conservative price forecast for Suncor in the next 12 months is $53 or a capital gain of 40%. When you factor in the 4.4% annual dividend, the total returns could swell even more.
With Buffett’s vote of confidence and the energy company’s strong financials, Suncor qualifies as a value stock. That the price has fallen in the last 30 days is an overreaction to the perceived industry weakness.
For value investors like Buffett, Suncor is trading at less than the company’s real worth and he’s holding onto the stock for the long term. The profit will come when the stock returns to or seeks its intrinsic value.
The bottom line
Warren Buffett owns a large chunk of Suncor as the company matches his investment principles. You should consider following the lead of the greatest investor in the world and invest in Suncor as well.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.
Fool contributor Christopher Liew has no position in any of the stocks mentioned. The Motley Fool owns shares of Berkshire Hathaway (B shares) and has the following options: short January 2021 $200 puts on Berkshire Hathaway (B shares) and long January 2021 $200 calls on Berkshire Hathaway (B shares).