Today, when Suncor Energy (TSX:SU)(NYSE:SU) stock is in a downtrend, you may think Warren Buffett did the right thing by exiting the stock in the first quarter. When the news came out that Buffett sold his entire stake in the oil giant, there were a plethora of articles criticizing his sell because the stock was in an upturn. But now, many think he was right in doing so.
I have identified some possible investing strategies that Buffett may have charted out for Suncor.
Why did Warren Buffett sell Suncor stock?
Let’s look at the oil market in the first quarter. Suncor stock surged 37% by mid-March as oil prices were rising by leaps and bounds. Between June 2020 and 15 March 2021, West Texas Intermediate (WTI) oil prices surged 80% to their 2019 level of US$66/barrel. Many economists were bullish on oil price, and they expected it to surge as much as US$100/barrel. Although it didn’t reach $100, the oil price did touch US$75.
If you look at oil stocks, they are cyclical. Oil stocks tend to peak in June as it is one of the biggest oil futures contracts for the year. Suncor stock reached its yearly peak between May and June for three consecutive years before the pandemic (2017-2019). In June 2020, the overall oil market was in its worst crisis.
Buffett may have wanted to tap this cyclicality. Hence, he might have bought Suncor stock around the June 2020 dip and sold it before June 2021. But then, isn’t 2021 different from other years? There is pent-up air travel demand, and airlines won’t mind high fuel prices as they can fly again.
This is a debatable topic.
Buffett’s oil mistake that cost him billions
There is pent-up demand for oil, but all major oil consumers have probably hedged their supplies during the June contracts. Hence, Buffett is not wrong to sell oil stocks when he got his chance. He is just playing safe after he lost billions from his investment in ConocoPhillips (NYSE:COP) in 2008. At that time, the crude price was US$100/barrel, so he may have expected the oil price to continue surging. But the oil industry suffered from the 2008 crisis, and the oil price never returned to the pre-crisis level.
The mistake Buffett made was buying the stock at a very high price. The key to earning in cyclical stocks is buying them at a lower price. Oil stocks are not for long-term investors, but active investors that can buy the dip and sell the rally.
Is a rally ahead for Suncor and other oil stocks?
At present, many factors are putting downward pressure on oil prices. Hurricane Ida in the Gulf Coast closed refineries, putting upward pressure on oil prices. But OPEC increased crude output to a 16-month high, putting downward pressure on the oil price. The rising Delta-variant cases have slowed economic recovery in the United States, while China’s oil import is rising.
Overall, there is downward pressure on oil prices. As for Suncor, it has an additional cost of reducing carbon emission from oil sands projects. Buffett made a smart active choice of booking profit when oil stocks peaked.
The current dip presents a buying opportunity, but the question is, has the stock bottomed, or is there more downside? That is difficult to say. What you can do is buy Suncor stock in phases.
How to trade in Suncor stock
Let’s take you to want to invest $2,000 in Suncor. Buy $500 worth of stocks at the current price of slightly over $23. Keep the next $500 denomination investments if the stock falls to $22, $21, and $20, respectively. This phased buy-in will reduce your average cost per share.
But if the stock surges instead of falling, reap the benefits of the rally. Sell the stock when you see the rally fading. Looking at the past cycles, Suncor stock tends to rally 20-25%. But the pandemic is an exception where the rally was around 50-70%. Do a phased buy-in and sell when the stock nears $30.