How To Profit With James River Coal Company


Shares of James River Coal Company (JRCC) have languished for some time now. The two year performance on the shares of the Virginia-based coal miner is -86.6%. The short-term trend hasn't been much more attractive. Overall sentiment in the coal market has been negative for years. Short-term outlook is not good, either. And this particular coal miner's balance sheet is laden with debt. Just two months ago, JRCC traded at a 27% premium to today's price.

If you analyze the 200-Day chart for the stock, you'll notice that movement has not been too erratic except for the two month period surrounding the election. The price of coal and the ensuing result on the coal miners and manufacturers has been inextricably tied to macro and political data. The Obama administration has made it clear that the future of this country's energy independence lies in our nation's rich resources of oil, natural gas, and the burgeoning - though not yet financially efficient - alternative energy sector. In his State of the Union address, he reaffirmed his conviction toward moving away from any energy sources that drive pollution. He stood firm, and told the nation that he is prepared to issue executive orders to dictate the direction of our energy policy.

200 Day Chart of JRCC

From October 3, 2012 to December 3, 2012, the stock rose from closing prices of $2.65 to $5.43, then fell to $2.12 and rose again to $3.69 before settling back into its normal trading range. If you discount the run, fall, and subsequent rebound (all highly driven by the election), you'll notice a general uptrend from the lows of $1.71 in July up until a reversal in early December, and then the continued downtrend that we're currently facing. Once the political uncertainty cleared and the Obama administration was elected to another four years, the bears took over.

So how do you make money with this type of highly volatile stock? Remember back to when you learned how to color in nursery school? What did your teacher always tell you? "Color inside the lines." Well the same rings true with James River Coal Company.

This isn't a buy-and-hold type of stock. But it also wouldn't be advisable to go short and take your eyes off of it. This stock bounces; it moves. It's fluid, and you don't want to get caught swimming upstream. So color inside the lines. Plot out a moving average envelope (upper and lower) and trade within it. You're going to miss the runs and the landslides when you play this game. But JRCC behaves in a pretty predicable manner. It is wildly volatile within the moving envelope range, but (discounting election volatility) it typically does ordinarily stay confined to the range.

JRCC is certainly investable, as long as you understand the fundamentals of the company you're dealing with. I spent most of 2012 long JRCC. I got in at what I believed to be an attractive price (originally in the high $4s). I averaged down as the stock sank lower and lower, and I spent most of the year waiting for the stock price to go up. The problem was that I had a buy-and-hold mentality on it. The fundamentals were not there to support that type of trading. The stock remained highly volatile within the trading range (10% daily swings, several days in a row), but the fundamental backdrop and story of JRCC was still beaten down.

The story means everything to this type of stock. It is fairly independent of the major indices, but goes wild with any macro or political news. As a trader, you need to use that to your advantage. Don't try to control the stock. Move with its natural ebbs and flows.

The industry outlook is negative. Coal miners have been decimated by a litany of factors (environmental regulations, weak demand, high supply, slowing international growth, Chinese uncertainty, macro). Additionally, the company is saddled with debt. James River Coal Company is trending downward, and has been for some significant time. That doesn't mean that you can't make money, though. In fact, if you understand the core fundamentals of this business, stay disciplined, and color inside the lines, you stand to make a lot of it.

Disclosure: I am short JRCC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.