Which is the better option strategy: Investing in a stock at/above its 52 week high or a stock getting near its 52 week high?
Sometimes it can be difficult to invest in a stock above its 52 week high. The technicals can indicate this being an overcrowded trade despite the positive fundamentals. While researching other stocks that have a big market capitalization, 4% dividend yields and considered a blue chip stock, I came across AT&T (T) which is a member of the Dow 30.
AT&T has a current market cap of 179.5 billion and is the largest company in the telecommunications space. AT&T has a diversified telecommunications business that is made up of landline, wireless and cable that services consumers and businesses.
When the name AT&T comes to my mind, I usually think about its main competitor Verizon (VZ). In current market conditions both AT&T and Verizon are performing nicely year to date. Verizon is at its 52 week high and AT&T is 6% from its 52 week high of 31.94. Investors could make the bullish argument for Verizon, but what if one Verizon's main competitors has a higher market cap, pays a bigger dividend and is making a run for its 52 week high. Then the answer is Dallas, Texas based AT&T. I believe that blue chip stocks that pay out over 4% dividends will continue to perform in early 2012. I also believe AT&T will continue heading north toward its 52 week high sometime in early 2012 for the following reasons:
1) Despite the failing T-Mobile deal, AT&T didn't drop more as maybe investors expected. AT&T fell to around 27.50 in early December, but then has bounced upward in price despite a huge breakup up fee being paid to T-Mobile.
2) Blue chip stocks that pay over 4% dividend yields are great, but 5% blue chip dividend stocks are even better. AT&T currently pays out a 1.76 (5.9%) dividend yield with the next dividend paying out 0.44 cents a share on 2/1/2012.
3) Watch for AT&T's continued strength in sales for Iphone and continued growth in its U-verse business. The Iphone has been a great source of sales for AT&T despite the higher margin costs that come with selling the Iphone.
4) AT&T's total cash from operations has increased every year since 2006. This should allow AT&T to continue to be aggressive in purchases and acquistations.
5) AT&T's price to earnings is 15.35 times earnings and is currently below its industry average of 29.84.
6) In the last three months there are no analyst sell recommendations on AT&T.
I believe AT&T will get closer to its 52 week high of 31.94. AT&T closed on December 30th at 30.24. Taking AT&T's 52 week high and subtracting this from Friday's close there is $1.70 or 5.65% possible upside. Buying 100 shares will set you back $3,024 dollars (not including commissions.) If your short term bullish on AT&T, but don't want to fork over $3,024 for every 100 shares of AT&T why not use options.
I currently own the March 28 (ITM) calls on AT&T that I bought for a price of 2.17 per contract. The 27 level on the chart above shows support since August, but I decided to go with the 28 level. The reason why I did the (ITM) call option trade is because of the low break even cost on a stock that has positive fundamentals and a blue chipper. To calculate your break even cost take the strike (28) and add to current option price (2.26) which equals 30.26. Now take 30.26 (-) current stock price of 30.24 and this equals 0.02. Now you only need a two cents move in the stock to make money.
I enjoy low break even trades since you only need a small movement in the stock to profit. Since this trade is using (ITM) calls you can be obligated to purchase AT&T if this holds above the 28 level. At the 28 level, this has almost been four months since AT&T has been there and the 28 level provides a little over 7% of downside protection from AT&T's current stock price. If Investors believe AT&T will continue to make a run for its 52 week high then this trade might be for you or wait for a pullback and own a blue chip at a cheaper price.
Additional disclosure: I Currently own March 28 calls on AT&T.