Warren Buffett knows a market crash provides opportunities to buy top stocks at great prices. That’s how he became one of the best investors in history.
Warren Buffett Indicator signals another market correction
Warren Buffett follows a number of market trends and indicators. His favourite is a calculation that takes the total value of the stock market and matches it against quarterly gross domestic product (GDP).
The math is simple yet very revealing. Warren Buffett has said the metric is “probably the best single measure of where valuations stand.” Investors just need to divide the total market capitalization of any country’s stocks that are publicly traded by the most recent numbers on quarterly GDP.
In the United States, for example, the Buffett Indicator is around 175% putting it within the range of its record levels. This suggests a meaningful correction or market crash might be on the way in the near term.
Overbought markets can go much higher before they crash. Nobody knows when the correction will occur, but it will happen. Analysts and top investors continue to advise keeping some powder dry for the next market downturn, as it could be sharp but short-lived.
Best Warren Buffett stocks to buy in Canada
Warren Buffett’s Berkshire Hathaway spent US$10 billion last year to acquire natural gas transmission assets. The bet suggests Buffett sees long-term value in the natural gas sector. Canada and the United States have started to ship liquified natural gas to international markets, where prices are often much higher.
A top Canadian pick in the gas transmission sector would be TC Energy (TSX:TRP)(NYSE:TRP). The former TransCanada has $100 billion in assets with gas transmission and storage operations in Canada and the United States. TC Energy bought Houston-based Columbia Pipeline Group in 2016 for US$13 billion. The deal gave TC Energy strategic gas transmission assets connecting the Marcellus and Utica gas plays in Appalachia to the Gulf Coast.
TC Energy raised the dividend in 2020 and intends to hike the payout by 8-10% this year. Distribution increases should be in the 5-7% range in 2022 and beyond. The company has $37 billion in secured capital projects on the go to support revenue and cash flow growth.
TC Energy trades near $54 per share compared to $76 before the pandemic, so the stock already appears cheap. At the current levels, the dividend provides a 6% yield. Any downside in the next market crash should be viewed as a buying opportunity.
What about oil stocks?
Warren Buffett’s firm also bought shares of Suncor Energy (TSX:SU)(NYSE:SU) in 2020. This is a contrarian play at a time when oil producers remain out of favour and refineries face reduced fuel demand. Suncor produces oil, but it also owns four large refineries and operates about 1,500 Petro-Canada service stations.
Suncor stock already bounced off the 2020 lows, but the share price still appears oversold. Global gasoline demand is expected to recover to 2019 levels by the end of 2021, as commuters head back to the office. The jet fuel market will take longer to recover.
Calls for the demise of oil demand might be premature. This could be why Warren Buffett sees opportunity in Suncor. Developing countries will increase their oil usage before they switch to electric vehicles. Part of the reason is affordability, but the larger issue lies with inadequate electricity infrastructure.
The stock trades near $24 per share and provides a 3.5% dividend yield. A drop back to $20 wouldn’t be a surprise on a broad-based market correction. Suncor stock traded for $45 a year ago, so there is decent upside potential.
The bottom line on investing like the Oracle of Omaha
Warren Buffett says investors should be fearful when everyone else is greedy and greedy when the market is fearful. The Buffett Indicator suggests this might be a good time to get some cash ready for the next crash.
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The Motley Fool owns shares of and recommends Berkshire Hathaway (B shares) and recommends the following options: short March 2021 $225 calls on Berkshire Hathaway (B shares), short January 2023 $200 puts on Berkshire Hathaway (B shares), short January 2021 $200 puts on Berkshire Hathaway (B shares), and long January 2023 $200 calls on Berkshire Hathaway (B shares). Fool contributor Andrew Walker owns shares of TC Energy.