Cole Smead got Canadian energy right when few investors wanted anything to do with the sector. Now, after some of his biggest stock picks have delivered enormous returns, is there still money to be made? Cole was one of the top-performing stock pickers in our mid-year review, claiming both the number one and number three spots thanks in large part to his winning Canadian energy bets. Now, he returns to explain why he believes the Canadian oil trade is far from over, even after a massive rally.
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Past picks scorecard
Two big winners and one laggard from Cole’s February picks.
- Pandora (CPH: PNDORA): up 60%. Still owns it. Bought near a 52-week low when the silver price was squeezing margins. Silver has come off, and Pandora is shifting to plated silver to get margins back. His one gripe: “They need to buy back stock. Come on, guys.”
- Strathcona Resources (TSX: SCR): up 53%. Still owns it. A pure-play SAGD producer generating about a 15% free cash flow yield, mostly returned by buying out minority shareholders. With Cenovus paying a record price for Athabasca, there are only a few scaled SAGD players left, and Strathcona is one of them.
- West Fraser Timber (TSX: WFG): down 8%. Still owns it and has added more over the past two quarters. He calls it the best capital allocator in lumber. Housing is weak, but “everything you just said, everybody knows.” He argues housing follows marriages and kids, not the 10-year Treasury, and a bear market in AI stocks could pull rates down and revive housing.
Cole Smead’s Pro Picks
1. International Petroleum (TSX: IPCO)
- Production: about 45,000 barrels a day, with the 30,000-barrel Blackrod SAGD project ramping up on time and on budget
- The dream: a second 30,000-barrel phase plus add-ons could take it to around 80,000 barrels a day in roughly seven years, about the size MEG Energy was
- Management: led by Will Lundin, with the Lundin family as a major shareholder. It was buying back stock even before its growth project was finished, which “no one does”
- Thesis: Cole started buying early this year, valuing it off the price Cenovus paid for MEG. Higher oil prices and the even richer Athabasca deal have made it more valuable since. Scaled SAGD producers are “a lost breed,” and this is one of the last.
2. Barclays (LSE: BARC)
- Valuation: about 0.8 times book value
- Returns: a low-teens return on equity, possibly heading to 15%
- Buybacks: about US$3.7 billion so far, done at or below book value
- Thesis: “This is not your grandparents’ European banking anymore.” Cole sees European banks consolidating the same way Canadian oil sands producers have, with scale as the path to higher returns. Barclays is still trading below book despite much better returns, so every buyback below book grows value per share. The worries about rates and private credit exposure are, in his view, already priced in.
3. Auto Trader Group (LSE: AUTO)
- Performance: down about 40% from its highs
- Returns: about $400 million in profit on roughly $750 million of capital, a return on capital above 50%
- Valuation: about 12 times free cash flow
- Thesis: the UK’s dominant used-car marketplace, with about 80% of the market, fell alongside software stocks on AI fears and frustrated its dealer customers with a new product. Cole says a business earning over 50% returns on capital doesn’t get this cheap often: “Those other things don’t make 50% returns on capital.”
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DISCLAIMERS: This text AI generated and should be checked against actual delivery. The content provided in this podcast is for informational purposes only and does not constitute financial, investment, or professional advice. The views expressed by the host and guests are their own and do not necessarily reflect the opinions of any organization or company. The host and guests may maintain positions in any securities discussed on the podcast. Always consult with a qualified financial advisor or professional before making any investment decisions.
