Suez Canal Company

The Suez Canal Company (Compagnie Universelle du Canal Maritime de Suez) was the corporation that constructed and operated the Suez Canal between the Mediterranean and Red Seas. While a monumental feat of 19th-century engineering, for investors, it represents something far more exciting: one of the greatest case studies in the history of Value Investing. The legendary investor Benjamin Graham discovered that the company was a classic Asset Play, where the stock market was valuing the company for its canal operations but completely ignoring a treasure trove of hidden assets on its books. He realized the company’s portfolio of investments was worth substantially more per share than the stock's trading price. This made the investment a quintessential example of buying a dollar's worth of assets for 50 cents, a core tenet of Graham's philosophy. The story of his investment is famously detailed in his book, The Intelligent Investor, and serves as a masterclass in looking beyond the obvious and scrutinizing the Balance Sheet.

At first glance, investors in the mid-20th century saw the Suez Canal Company as a straightforward, if somewhat politically risky, utility. Its profits came from the tolls charged to ships passing through the canal. The market priced the company based on these earnings. Graham, however, did what great value investors do: he read the fine print in the company’s annual reports.

Graham discovered that the company's true value had little to do with the canal itself. The company had been investing its profits for decades, accumulating a massive portfolio of high-quality securities. The market assigned almost zero value to these holdings. He essentially found a brilliant investment company disguised as a boring utility. The hidden assets included:

• A huge portfolio of blue-chip stocks, including a 2.5% stake in Standard Oil of New Jersey (which would later become ExxonMobil).
• A world-class collection of bonds and other fixed-income securities.
• Significant real estate holdings.
• A large cash reserve.

When Graham added up the market value of these investments and divided it by the number of shares, he found their value alone was significantly higher than the company's stock price. In essence, an investor was buying this incredible portfolio of assets and getting the profitable canal operation for less than free. This is the kind of lopsided, low-risk opportunity that value investors dream of. The company's Market Capitalization was a fraction of its true underlying worth.

Graham’s investment in the Suez Canal Company wasn't just a theoretical exercise; it paid off handsomely, but not in the way most would have expected. The story highlights the importance of both patience and the role of an unexpected Catalyst in unlocking value.

The investment remained a classic, undervalued “cigar butt” for years. The catalyst arrived in 1956 when Egyptian President Gamal Abdel Nasser nationalized the Suez Canal, seizing the company’s primary operating asset. On the surface, this looked like a catastrophe for shareholders. The stock plummeted on the news. However, Graham remained calm. He knew the company's real value lay in its investment portfolio, which was held in Paris and London, far from Nasser's reach. The nationalization forced the company's hand. Deprived of its main business, it eventually had to liquidate its massive investment portfolio and distribute the proceeds to shareholders. Investors who, like Graham, understood the company's true asset value were rewarded with a massive return, far exceeding the stock's price before the crisis.

The Suez Canal Company saga offers timeless wisdom for any ordinary investor:

• Dig Deeper: Don't just look at a company's popular story or its Income Statement. The real gold is often buried in the balance sheet and the footnotes of annual reports.
• The Market is Not Always Right: Mr. Market can be moody and short-sighted, often overlooking significant underlying asset values. Your job is to find these pricing errors.
• Value is a Safety Net: Graham's investment was protected by a large Margin of Safety. Even if the canal business went to zero (which it did), the hidden assets provided a floor for the investment's value.
• Be Patient for a Catalyst: Unlocking value can take time. Sometimes an external event is needed to force the market—or the company itself—to recognize the true worth of its assets.