Legendary trader Steven Cohen (Trades, Portfolio) shook up his portfolio in the third quarter of 2022 by offloading several of his most prominent 13F holdings. A notable shift in his portfolio was his sale of Suncor (SU, Financial), which might surprise many due to the year-to-date rally of most energy assets. Moreover, Suncor recently released its third-quarter financial statements, which revealed an astonishing 33.01% in year-over-year revenue growth.
Cohen's investment firm, Point72, implements an actively managed investment mandate emphasizing the near-term financial market environment. In light of this, here's my take on why the guru might have turned bearish on Suncor (though please note, this is all my personal speculation, as I do not have insider information on Cohen's thoughts).
Investors should be aware that 13F reports do not provide a complete picture of a guru’s holdings. They include only a snapshot of long equity positions in U.S.-listed stocks and American depository receipts as of the quarter’s end. They do not include short positions, non-ADR international holdings or other types of securities. However, even this limited filing can provide valuable information.
Fundamental analysis
A bottom-to-top analysis reveals Suncor's fundamentals are robust. As previously mentioned, the company strolled to a substantial revenue number in its third quarter. In addition, Suncor revealed stellar operating cash flow per share growth with an increase of7 cents per share since the same quarter last year.
Furthermore, Suncor's production is admirable. For example, the company's oil sands production surged to 646 000 barrels per day from 605,100 in last year's third quarter. In addition, total upstream production skyrocketed by 25,500 barrels per day since last year, primarily due to demand and higher productivity at Fort Hills. Lastly, refinery throughput increased by 3,300 barrels per day as capacity reached 100%.
Suncor's prospective results going forward could go either way. The company's CapEx has surged since the turn of the year, presumably from a combination of post-Covid lockdown maintenance and higher production demand amid a global energy shortage.
Despite its aggressive re-investment, Suncor's long-term CapEx trendline suggests the company's residual value might be above its sustainable moving average, which is corroborated by the cyclicality of its ex-post net income. Therefore, I have concerns about a near-term cyclical downturn.
A cyclical downturn
Even though energy companies have recently produced record profits by taking advantage of global energy shortages, cyclicality will likely prevail. Oil and gas prices have touched their year-to-date lows lately, indicating that market participants anticipate market supply and demand to reach equilibrium. Moreover, commodity prices are settled ahead of time; the market usually prices future demand and supply levels of coincidental market dynamics.
Furthermore, a global recession is pending (according to economists) and already in full swing (according to the average citizen). According to the International Monetary Fund, global demand destruction is beckoning as global manufacturing activity is on a downward trajectory. Another factor to consider is China's persistent pandemic lockdowns, which are adding significant constraints to international supply lines, providing substantial obstacles to a post-Covid economic recovery.
Source: IMF (Global PMIs)
Cumulatively, the above-mentioned macroeconomic factors could dent Suncor's prospects due to the company's sensitivity to cyclical risk. Investors often believe companies and their stocks grow into perpetuity, which is a fallacy because the economy is a cyclical vehicle, and some stocks such as energy stocks are much more cyclical than others.
Suncor is a prominent player in the energy space; however, without macroeconomic support, the company's activities will likely recede. Point72 may have taken notice of cyclical risk, in turn, parting ways with Suncor stock..
Valuation and momentum profile
Although ex-ante qualitative analysis paints a bearish picture, Suncor's quantitative metrics present a sense of optimism. The stock's price-earnings ratio of 8.68 is on the lower end of the spectrum and indicates that the asset is undervalued relative to its cyclical average. More importantly, Suncor's stock is trading at 1.69 times its book value, which is below the metric's overvalued threshold of 3.00. A natural resource company's book value is a critical market-based component because its inventory is quoted and traded on public exchanges, thus presenting a transparent fair value estimate.
The stock has a GF Value rank of 9 out of 10 based on how well stocks with a similar GF Value chart have performed historically.
Furthermore, the GuruFocus alternative valuation box below suggests Suncor's fair value based on the projected free cash flow model exceeds the $49 handle. The free cash flow valuation approach has received criticism in recent years due to market efficiency concerns; nonetheless, the method remains a helpful price discovery tool in my view.
Technical talking points
Technical analysis is often oversimplified, with many analysts arguing that security price zones are repetitive. The concept is debatable; however, empirical evidence suggests that momentum metrics provide an objective assessment.
The momentum anomaly states that investor herding often causes stocks to outperform the market for longer than they intrinsically should. According to GuruFocus' data, Suncor has experienced tremendous relative strength over the past 12 months; however, short-term momentum is waning. My financial research suggests that it could be helpful to consider long- and short-term momentum anomalies to rebalance a portfolio efficiently.
Concluding thoughts
Suncor is a "best-in-class" energy stock in my view. The company's past results indicate its ability to increase throughput and capacity whenever needed. In addition, Suncor's recurring CapEx investment conveys solid future growth prospects.
Despite the company's robustness, Point72's bearish outlook on Suncor stock shouldn't come as a surprise, as cyclicality could play a significant role in the coming quarters. Suncor has impressive valuation metrics; however, its recent momentum trend indicates that the stock could be entering a sustained downturn.
