October 5, 2015

On Monday, the S&P 500 was up 1.8% and Toronto was up 1.6%.

Notable gainers included TransAlta up 5.7%, Canadian Western Bank up 6.2%, America Express up 3.9% and AutoCanada up 6.2%.

Valeant pharmaceutical was down 11.1%. Valeant is being accused of price gouging. Even in competitive non-regulated markets there are legal restriction’s on price gouging. These restrictions in law date back¬†several hundred years in the English common law. I am not a fan of this company as I noted on July 30.

The Suncor deal is being described as Suncor buying Canadian Oil Sands Trust for about $4.3 billion for the equity and $6.6 billion including the assumption of debt.

But this is an all-share deal. Suncor would issue shares to pay for this rather than paying cash such as by borrowing the money.

Using the method that Warren Buffett has used to describe such deals it would be described as follows: The current Suncor share owners would collectively give up 7.7% off the current Suncor (share count to be increased by 8.4%, in order to gain 92.3% of Canadian Oil Sands Trust. The current owners of Canadian Oil Sands Trust will own 7.7% of the combined entity and are thus giving up 92.3% of what they already own in order to gain 7.7% of the current much larger) Suncor operation. If there are synergies  and cost savings then perhaps the deal will work out well for both groups. Or perhaps the deal is more favorable to the buyers.

Canadian Oil Sands is trading somewhat above the value of the one quarter of a Suncor share to be received for each COS share and were up 55% today.

It is perhaps remarkable that in a so-called efficient market, Canadian Oil Sands shares were apparently under-valued by at least half (correction, should read by at least one third as in 0.55/1.55=0.355).

Some of us indirectly owned Canadian Oil Sands shares when we owned the Oil Sands ETF that traded as CLO. Sadly, that ETF was wound down last month by BlackRock and we received cash for our CLO shares. Presumably, BlackRock wound it down because there was too little buying interest. That is typical, the investing public no longer wanted CLO or Canadian Oil Sands Trust when the price of oil fell. Even though these were very long term assets they were priced in the market as if oil was going to stay down.

Perhaps what we can take form this episode is that the market trading price certainly does not ALWAYS represent a reasonable price for a company. Sometimes it is way high and sometimes way low. Most of the time it is probably reasonable and one has to be cautious when they are betting that they know better than the market. But sometimes it is a good bet.