The Motley Fool

Warren Buffett: Avoid Canadian Stocks at All Costs?

Image source: Getty Images

Should investors give meaning to Warren Buffett’s decision to sell his entire holdings in Restaurant Brands International (TSX:QSR)(NYSE:QSR)? Is the legendary investor telling people to avoid Canada’s equities market at all costs? Many are wondering what his motivations are after he supported the fast-food chain operator for decades.

If you compare the year-to-date performance of the TSX with the three main U.S. exchanges, you might say Buffett was correct to make a move. As of October 1, 2020, the NASDAQ (+26.23%), S&P 500 (+4.64%), and Dow Jones (-2.53%) are outperforming the TSX (-5.15%).

However, I believe it’s more of Buffett’s bleak outlook for quick-service restaurants, not the TSX in particular. Although Berkshire Hathaway sold all Restaurant Brands shares in Q2 2020, the company bought more shares of Canadian oil kingpin Suncor Energy (TSX:SU)(NYSE:SU).

Challenged business

Restaurant Brands is a major player in the quick-service restaurant space globally, but COVID-19 disrupted its operations in the first quarter of 2020. Buffett is veering away from businesses that are gravely affected by shutdowns. His divestment didn’t influence investors much as operations came back to life in the next quarter.

Despite the unprecedented challenges due to the pandemic, Restaurant Brands posted 90% of prior year’s system-wide sales in Q2 2020. About 93% of its restaurants worldwide have resumed operations. According to Jose Gil, RBI’s CEO, drive-thru, digital, and delivery channels were important differentiators.

The risk to RBI going into the fourth quarter is the sharp rise in COVID-19 cases. In Canada, the average daily case counts are approaching the peak levels in April. Canada’s chief public health officer, Theresa Tam, said things have escalated quickly and can escalate further. Nationwide closures of restaurants and bars might follow.

The 10 Best Stocks to Buy This Month

Click here to learn more!

Better value

Why did Buffett dump Restaurant Brands and keep struggling Suncor Energy? The GOAT (greatest of all time) of investing builds his wealth over the long term. He sees the oil company as a better value proposition, especially when crude prices rebound.

Thus far, the energy sector is the worst performer (-57.03%) on the TSX. Meanwhile, Suncor investors are losing 62.44% year to date versus the -4.45% of RBI investors. The headwinds are strong due to the twin impact of the COVID-19 and depressed oil prices.

Suncor’s operating loss widened to $1.49 billion in Q2 2020, following the $309 million operating loss in Q1 2020. From a top line of $9.5 billion in Q4 2019, revenues sank to $7.4 billion and $4.2 billion in Q1 2020 and Q2 2020. Because of the declining top and bottom lines, management cut dividends.

For prospective investors, the 5.42% dividend is still above the average yield on the S&P 500 Index in the U.S. Neil Mehta, an analyst at Goldman Sachs, says Suncor maintains a healthy balance sheet. The margin-enhancing projects through 2025 can potentially deliver $2 billion in cash flow growth. Many analysts recommend a buy rating for the cheap but embattled energy stock.

Not betting against the TSX

I don’t think you should bet against TSX stocks yet. If that is what Warren Buffett is suggests, Berkshire Hathaway won’t boost its holdings in Suncor Energy. Also, the conglomerate purchased 20.9 million shares of Canadian mining stock Barrick Gold in Q3 2020.

The 10 Best Stocks to Buy This Month

Renowned Canadian investor Iain Butler just named 10 stocks for Canadians to buy TODAY. So if you’re tired of reading about other people getting rich in the stock market, this might be a good day for you.

Because Motley Fool Canada is offering a full 65% off the list price of their top stock-picking service, plus a complete membership fee back guarantee on what you pay for the service. Simply click here to discover how you can take advantage of this.

Click Here to Learn More Today!

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 and recommends Berkshire Hathaway (B shares). The Motley Fool recommends RESTAURANT BRANDS INTERNATIONAL INC and recommends the following options: long January 2021 $200 calls on Berkshire Hathaway (B shares), short January 2021 $200 puts on Berkshire Hathaway (B shares), and short December 2020 $210 calls on Berkshire Hathaway (B shares).

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss an important event.

Iain Butler and the Stock Advisor Canada team only publish their new “buy alerts” twice a month, and only to an exclusively small group.

This is your chance to get in early on what could prove to be very special investment advice.

Enter your email address below to get started now, and join the other thousands of Canadians who have already signed up for their chance to get the market-beating advice from Stock Advisor Canada.