5 Timely Valuations in Coal Production

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 |  Includes: ACIIQ, ANRZQ, BTUUQ, CNX, WLT
by: Steven Bauer

My focus is “investing wisely,” e.g. taking advantage of the bull/bear cycles as they occur within the overall marketplace. Integrating modern analytics within these “cycles,” means maintaining a process of the thorough fundamental analysis of many companies and more than 200 industry groups in my universe. I believe that this discipline provides the necessary clarity regarding the rotation that most all sectors, industry groups and companies goes through – from fundamentally favorable times to unfavorable times and perhaps back again.

“The market is doing what it loves to do.” Lately, that means it is both fundamentally and technically very fickle. What the investor often forgets is that what appears to be a fact is, in reality – very creative fiction. The flow of fictional stories being told by Wall Street and the media are so compelling that the average Investor takes the hook, every time. That’s a fact and, for me, it is very sad.

The current position of the Coal Production industry group both US domestic and international is quite high on my consensus rankings of over 200 industry groups. Therefore, I expect it (Coal) to begin to hold up well during the time frame of my anticipated pullback. Over the short-term, this industry group does definitely, qualify as "currently favorable" and the shares of its component companies should likely be considered during anticipated bullish moves in the marketplace. Over the longer-term I am quite positive. The oxymoron is – as always: Can you afford the risk/reward ratio and how is your insight to making timely investments? These companies are definitely doing well in this current rally.

In the table below you will see why my approach of valuation offers five rather strong companies that I believe can profitable in the intermediate-term, however not necessarily now. Remember to be a bit patient before taking positions.

Valuation/Comparative Analytics Table: Coal

Stock

Cur. Price

My Target Price % Above (+) or Below (-) Cur. Price “Tweaked”

PEG

P/E

Forward P/E Average of Low/High Estimates

Divergence (%) -then- “Tweaking” -to get- My Target Price % Multiplier

Comments / My Analytics / Weighting: Fundamental (40%) Technical (35%) Consensus (25%) / When my anticipated pullback occurs - lower prices definitely forecasted for all?

Peabody Energy (BTU)

57.8

+ 25% - 75%

0.99

23.7

12.8

+ 185%

Obviously a very strong valuation and price projection.

Consolidated Energy (NYSE:CNX)

41.5

+ 20% - 65%

0.57

22.1

13.5

+ 164%

Obviously a very strong valuation and price projection.

Alpha Natural (ANR)

47.5

+ 50% – 200+%

1.08

56.3

11.4

+ 494%

Obviously a very strong valuation and price projection.

Walter Energy (NYSE:WLT)

93.9

+ 20% - 60%

3.81

15.7

9.1

+ 172%

PEG is too high for me. Avoid for the Near-Term.

Arch Coal (ACI)

28.5

+ 50% - 200+%

0.34

41.3

10.9

+ 379%

Obviously a very strong valuation and price projection.

Click to enlarge

Notes: Fundamental valuation, data in today’s marketplace, requires that I look at the numbers as being either realistic or creative – which more recently is using “new / funny math.” Because of the valuation data inconsistencies, I have adopted an additional procedure that I call “Tweaking the Results." This procedure is sometimes needed to get me back to “realistic valuations.” It requires having an eye on the short and intermediate-term company’s price movement, and is definitely not a part of my rather unique technical analysis. My valuations, also considers the two-year - forward P/E data. Using this procedure produces very accurate analytics for decisions at bullish and bearish inflection points.

Most financial analysts determine the price target range by estimating a - future earnings per share and then applying a price-to-earnings "multiple," also known as the P/E ratio. I prefer to calculate price targets (high/low) for both the current and next fiscal year by applying the stock's present multiple to the average analyst's estimates and follow with some foxy "tweaking" of the results.

Further, I believe that there should be just two aspects of fundamental valuation. They are now and later, which translates to 1-2 years and more than three years. Obviously, the further out we try to project earnings and cash flow the more inaccurate the data becomes. That is why I do my valuations rather frequently.

PEGs: You will note that these companies are carrying low PEG ratios with the exception of Walter Energy. Normally, that is typical of Coal and does not mean much to my current valuations, however I am quite favorably impressed.

For a current (up to the minute) chart of the Coal and several other industry groups see here.

Since coming out of retirement in October 2007, I have witnessed a vast change in the “valuation” practices being offered by many financial analysts. The shenanigans and other "accounting practice games" were active before, but have now reached a new height of deception. The general public is often lazy about learning and perhaps naive. The financial analysts know that these characteristics exist and now are taking advantage. It's simple, the average Investor is asking to be told that – “all is ok” so that is what they are being given.

My Wrap

So while I believe the general market may be in for a pullback, the prevailing question from most investors is: How big will it be? Do I hold my current positions or do I sell? Is there a profitable alternative? Etc. The answer will be obviously quite clear when it (the pullback) is over but an old axiom tells us to be prudent in times like this. You might want to remember that, cash is always an excellent safe harbor. However, if you are a proactive Investor, taking bearish positions may be also being wise.

This is just another (one of many) “bellwether” industry groups to help identify candidates for buying and candidates for short selling as the marketplace “cycles” from bull to bear and back again - over, and over, and over again.

The good news about the "marketplace" is - we are presented frequent and conservative/low risk opportunities to invest – long, invest – short or to simply to hold cash. For me, this is “investing wisely.”

Author's Disclosure: No Positions