With the downturn in commodities there are many investors now looking for ideas. We call it fishing as one sets out lots of hooks while looking for ideas to research and then find various ideas which seem investable. The bottom feeding ideas are always the best looking as they offer the greatest rewards, but they also possess a lot of risk.
Today we are going to talk about coal, which has seen a lot of bottom feeding interest as of late. Alpha Natural Resources (ANR), Arch Coal (ACI), CONSOL Energy (CNX) and Peabody Energy (BTU) have all been the focus of investor optimism lately but we think that it may be a bit too early to get excited here - at least where the industry as a whole is concerned.
Chart of the Day:
We keep getting asked about coffee these days as a possible bottom feeder investment. Over the past year or so we have looked at coffee but stated that we wanted to see a confirmed move upwards which caught our eye, and thus far we have not seen that. May offered some hope but that rally was short lived and resulted in another steep step downwards. October was another rough month for investors and totally wiped out the base we saw building for a possible move upwards. It is our continued belief that one has to remain bearish coffee until an uptrend develops and that one should be long the coffee names until then as opposed to be short coffee.
Commodity prices this morning are as follows:
- Gold: $1280.10/ounce, down by $1.00/ounce
- Silver: $21.185/ounce, down by $0.097/ounce
- Oil: $94.71/barrel, down by $0.43/barrel
- RBOB Gas: $2.5984/gallon, up by $0.0019/gallon
- Natural Gas: $3.613/MMbtu, up by $0.039/MMbtu
- Copper: $3.2415/pound, down by $0.018/pound
- Platinum: $1435.20/ounce, up by $2.80/ounce
Coal Names Rising ...
Don't look now (well maybe do!), but coal names are rising. Alpha Natural Resources caught our eye as the stock is trading around $8/share and up sharply from lows it was trading at not all that long ago.
Our guess is the latest run sees a sell-off much like the recent runs have seen. It may be quick or it may be drawn out, but we think it occurs.
Source: Yahoo Finance
Gains have been seen elsewhere in the coal complex as well, with Arch Coal, Peabody Energy and CONSOL Energy also seeing their share prices rise recently. We have previously discussed the opportunity that CONSOL offered shareholders via their plans to split the coal and natural gas segments of their business and still believe that the company offers the best play in the sector for short-term gains. Our long-term pick remains Peabody Energy due to their diversified production base and industry leading position. Being a low cost producer during this downturn has been key, and shall continue to be important moving forward as it is our opinion that any upturn in the business will be slow and (hopefully) steady. We would note that today's news regarding ethanol would seem to benefit those industries under attack from greens and environmentalists, as there is now concrete evidence from respectable sources which proves that all of these renewable ideas are not necessarily green in nature.
The wild cards in any coal resurgence in our opinion remain Alpha Natural Resources and Arch Coal because of their standing in the industry. They are not among the blue chip names yet not among the small, high-cost producers which have been hobbled by the downturn. Instead these are the middle-of-the-pack names which are the type of companies that in a new bull market for the industry would give investors the biggest bang for their buck. Yes the smaller names with balance sheets in shambles would sport the largest percentage increases, but these are the penny stocks for the institutional investors and investment advisers - a far larger capital pool to draw from.
The only name we would consider buying at this time is CONSOL Energy and that is simply due to the split of natural gas and coal assets. The next best company in the sector is Peabody Energy, and even it has had a tough year.
Source: Yahoo Finance
A cool winter would most certainly help these names, but a cool election season for Democratic candidates would be even better. We are still not ready to move from our current neutral standing on these names to a bullish standing, but think that Republican gains in the next set of elections to occur in the U.S. paired with gains in global growth would go a long way in shifting our outlook. The gains have been nice, but as we have stated during each of the last few runs, we would be taking profits.