Suncor Got You Down? How About Getting Paid to Wait?

Wednesday (Feb 6, 2013) Suncor (SU) announced that they were writing off $1.5-billion in its Voyageur oil sands upgrader. For those not familiar with the Oil Sands story, the Voyageur upgrader stood as a key part of Suncor’s growth plans to convert the heavy bitumen oil to the higher priced light crude oil. You can read the complete story, http://www.theglobeandmail.com/globe-investor/suncor-writes-off-15-billion-as-upgrader-fortunes-fade/article8311727/.

Analysts were quick to reiterate their buy ratings throughout the day defending its long term value. They are not wrong. We are looking at it from a simple prospective:

Will Suncor continue to be a core blue chip Canadian company? Yes.
Will Suncor continue to be a leader within its industry? Yes.
Should long-term investors panic? Probably not.

While all this is true, any investor that has been around the block knows that in order for stocks to rise in price, they tend to ride momentum from the growth story or industry momentum. The reality investors must face is that Suncor just lost the wind from its sails. The stock dropped $1.85 (5%) to $32.53, distinctly below its 50 day moving average. Many technical investors and traders use the 50 day moving average as a depicter of bull and bear cycles for a stock. While we would not suggest that further weakness is imminent, we can certainly suggest that it is probable the stock will remain range bound as there is little catalyst for the stock to make new material progress.

If this was a high dividend paying stock like the Canadian banks or energy trusts, the investor would be paid to wait, but with a $0.52 (1.50%) dividend yield, it is not going to excite anyone.

So what can an investor do if you now own it?
Why not create a new cash flow from the stock with a covered call? The strategy can be executed in all accounts including RRSP’s and TFSA’s. If you are new to options, watch the short video on the strategy- http://www.m-x.tv/media/selling-call-options.

The stock has a 52-week high at $37.28 but has spent the vast majority of the last year below $35.00. With the recent news, the prospect that the stock will break to new highs over the summer, while possible, is unlikely. Today the September 2013 $35.00 call option was bidding $1.05 or 3.22% over 8 months.

1. If the stock did rally higher between now and September, the investor is obligated to potentially have to sell the shares at $35.00. Accounting for the $1.05 premium, would be the equivalent to selling it at $36.05.

2. If the stock stays range bound or lower through the summer, the investor would realize the 3.22% yield in addition to the 1.50% annual dividend. That is a net 4.77% yield combined.

While not every investor would find this appealing, I for one would be content to have created a guaranteed 4.77% yield that would rival the dividends received from many Canadian banks and telecoms.