The Kingdom of Saudi Arabia is best known for being an energy superpower: It is the world’s largest exporter of oil and the second largest oil producer, controlling the world’s second largest oil reserves and the sixth largest gas reserves.
However, as the world starts to move away from oil, Saudi Arabia is trying to find ways to diversify its economy and find new sources of income.
The Public Investment Fund (PIF) of Saudi Arabia was created to “drive the economic transformation of Saudi Arabia, through active long-term investments“. The PIF is the largest sovereign wealth fund in the world with total assets of over $320 billion, which could rise to $400 by the end of the year.
PIF states that it is “a patient investor with a long-term horizon. As such, we actively seek strategic opportunities […] that have strong potential to generate significant long-term returns“. PIF is optimistic about the post-coronavirus recovery: “You don’t want to waste a crisis from the opportunities […] If you look at the different sectors like airlines, oil and gas, entertainment – they’re all put on hold with the stoppage of the economy. We think once the economy is opening up, I think we will see a lot of returns“.
On May 15th, PIF submitted a filing to the US Securities and Exchange Commission in which they revealed their recent investments. What stocks did they buy and should retail investors also buy them?
What stocks did PIF buy?
The SEC filing reveals that PIF took advantage of the March dip in stock prices to go on a shopping spree.
Here is the list of stocks purchased in March:
- BP: $827.7 million
- Boeing: $713.7 million
- Citigroup: $522 million
- Facebook: $521.9 million
- Marriott International: $513.9 million
- Disney: $495.8 million
- Bank of America: $487.6 million
- Berkshire Hathaway: $78.4 million
PIF also has positions in oil and gas companies Suncor Energy, Canadian Natural Resources, Total, and Royal Dutch Shell; in technology giants IBM, Uber and Tesla; and others such as Automatic Data Processing, Union Pacific Corp, Pfizer, Starbucks, Live Nation, and Starbucks.
Should retail investors buy these stocks?
PIF is following Warren Buffet’s famous advice of being greedy when others are fearful. Indeed, PIF purchased these stocks when the market was at an all-time low and most investors were panic selling. Now that the dust has settled and the crisis is being contained, economies are reopening and the stock market is rising again.
Here’s my verdict on each of these purchases, broken down by sector:
- OIL AND ENERGY: Very undervalued sector due to the current oil crisis. Once economies reopen, oil prices will rise and so should the price of oil stocks.
- BP (NYSE: BP): Oil supermajor. Massive revenues, 2019 EBITDA of $28bn and 2019 Free Cash Flow of $10 billion. 11% dividend yield. P/B ratio of 0.83. Undervalued. BUY
- Suncor Energy (NYSE: SU): Huge revenues. Massive free cash flow. P/B Ratio of 0.92. Undervalued. BUY
- Canadian Natural Resources (NYSE: CNQ): 2019 revenues increased 9.47% from 2018. Massive Free Cash Flow. 7% dividend yield. P/E ratio of 9 and P/B ratio of 0.85. Undervalued. BUY
- Total (EPA: FP): Oil supermajor. 8% dividend yield. P/E ratio of 11 and P/B ratio 0.76. Undervalued. BUY.
- Royal Dutch Shell (NYSE: RDS.A): Oil supermajor. $300+ billion in yearly revenues. Massive EBITDA and Free Cash Flow. 4% dividend yield despite recent cut. Dividend will increase as oil prices recover. Healthy Balance Sheet. P/E ratio of 12 and P/B ratio 0.66. Undervalued. BUY.
- AIRLINES, CRUISE LINES, RAILROADS:
- Boeing (NYSE: BA): Poor management led to the 737 debacle. I’m not a fan of the company but it is a behemoth, recently got bailed out by the US government and shares a comfortable duopoly with Airbus. If you have a very long-term outlook then you should BUY at current levels.
- Carnival Cruise Lines (NYSE: CCL): PIF purchased more than 43 million shares at roughly $8 per share. The stock is now trading for appoximately $12 and apparently people are booking cruises for this fall. If operations resume in the coming months and business picks up then the stock will take off. BUY this stock only if you have a high risk tolerance.
- Union Pacific Corp (NYSE: UNP): Stable business. Gross Profit increasing. 80% Gross Margin, 25% Net Margins. EPS 8.38 is double industry average. Dividend has not been cut since 1997. Reliable income stock but growth prospects may be limited. BUY for the dividend and if your DCF valuation places intrinsic value above $200.
- BANKS & INVESTMENT FUNDS: A lot of justifiable criticism aimed at the banks but the Cantillon Effect guarantees that they will profit from the Fed’s Quantitative Easing policy. I believe they are still undervalued and PIF has purchased some best of breed stocks.
- Citigroup (NYSE: C): Revenues increase every year. P/E ratio of 5.71 and P/B ratio of 0.5. Undervalued. BUY
- Bank of America (NYSE: BAC): P/E ratio of 8.75 and P/B ratio of 0.77. Undervalued. BUY
- Berkshire Hathaway (NYSE: BRK.B): Warren Buffet is sitting on a huge cash pile but has yet to make significant purchases and says the market is still expensive. Is he waiting for a second stock market crash before going on a shopping spree? Regardless, Berkshire is a very well managed and profitable company. P/B ratio of 1.11 suggests undervalued but P/E ratio of 42 is high. No dividend. 12% average annual growth in stock price since 2010. BUY if you believe Warren and Charlie still have the magic touch.
- IBM (NYSE: IBM): $8.8 billion in cash. P/E ratio of 11. Dividend aristocrat. 5.5% dividend yield. Has paid dividends since 1912 and the last dividend cut was in 1992. Stable business but stock is on a downward trend since 2012. Reliable income stock but growth is inferior to other tech stocks. BUY for the dividend income but DON’T BUY if you prefer rapid growth.
- Facebook (Nasdaq: FB): Has bounced back very strongly from its March low and is almost back to where it was pre-coronavirus crisis. This is a very strong company with solid fundamentals: Wide moat, 30% average yearly revenue growth, $58 billion in cash, no long term debts, $21bn in 2019 FCF. BUY after a pullback under $200 unless you love the company then buy now.
- Tesla (Nasdaq: TSLA): Very expensive. I would wait for a pullback to $500 or under before buying but this stock’s immense popularity means it may not dip to such levels unless some very bad news comes out. Long-term investors who believe in the company’s future should buy now and hold. I’m sitting this one out until I see a decent price correction. DON’t BUY.
- Uber (NYSE: UBER): I’m not a fan of this stock and I don’t recommend buying it unless you have strong faith in the company’s ability to become profitable in the next few years. DON’T BUY.
- HOTELS & RESTAURANTS:
- Disney (NYSE: DIS): The coronavirus hit disney very hard but it is a very solid company who will recover and bounce back. Disney has cut its dividend to preserve liquidity. Under $115 the stock is a BUY.
- Live Nation (NYSE: LYV): $2.4 billion cash on hand. Rising revenues. No dividend. The main issue is will LYV resume operations as before the covid crisis? How will event management change? Don’t buy this stock if you don’t have a high risk tolerance. DON’T BUY.
- Pfizer (NYSE: PFE): P/E ratio of 13. >$50bn in yearly revenues. $9.8bn in cash. 4% dividend yield. 10 years of dividend growth. Will they somehow profit from the coronavirus by developing a new vaccine? BUY for the reliable dividend.
As always, you should conduct your own research before investing. I have only superficially analyzed the following stocks and more research needs to be done before buying them. Also, keep in mind that PIF’s strategy may work for them, but it may not work for you.
Ask yourself the following questions: Are you comfortable buying these stocks and holding them for the next 5-10 years? Are you prepared to purchase more if the price dips to average down your cost? Can you deal with potential dividend cuts if a global recession contracts business?
In sum, the majority of these stocks are solid long-term investments. PIF has obviously conducted serious research and purchased some best of breed stocks that should generate significant long-term returns.
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DISCLAIMER: This is not financial advice. Do your own research before investing.