The coal mining industry is cyclical and inherently volatile due to the large number of macro-economic and industry-specific issues that affect supply and demand. The coal mined is used for two main purposes, with the majority consumed for electricity generation (thermal coal) and the rest for global steel production (metallurgical coal).
Thermal coal demand varies seasonally, and the patterns change every year depending on periods of warm and cold weather. Furthermore, the demand changes depending on the prices of competing fuels. Plus, an expanding global economy pushes up the demand and prices for coal, and a weakening economy pushes down demand and prices.
The demand for metallurgical coal is even more closely tied to and sensitive to the global economy as it is the primary energy source used in the making of steel, which is extremely closely tied to the economy, due to extensive use of steel in public construction and infrastructure projects. Furthermore, the industry is also affected by weather events and federal environmental regulations that add to the volatility of the stocks in the industry. This creates alternate boom and bust cycles based on cyclical changes in supply and demand for coal, which often last three to five years.
Industry coal analysts often use a variety of complex data on coal exports and imports, weekly railcar loadings, coal stockpiles, coal production, and other data to arrive at overall industry supply and demand conditions, and their impact on the prices of specific coal mining stocks. As these alternate boom and bust cycles last three to five years, for the average investor, it is worthwhile to examine what the world largest fund managers, managing between $100 billion and over a trillion dollars, are buying and selling based on their analysis of premium data. For your benefit, we have compiled the most recent available data on buying and selling activities of over 30 of the largest fund managers (by asset size invested in U.S. equities) in stocks in the coal mining group.
We determined based on our analysis that mega fund managers are slightly bearish on coal miners. During the June quarter, these mega fund managers together cut a net $441 million from their $24.23 billion prior quarter position in the group, selling $2.16 billion and buying $1.72 million worth of stocks in the group. Furthermore, overall they are under-weight in the group by a factor of 0.5; that is, taken together, the 30+ mega funds have invested 0.5% of their assets in the group, significantly less than the 0.9% weighting of the group in the overall market.
The following are the two undervalued coal mining stocks that these mega funds are most bullish about (see table):
Arch Coal Inc. (ACI): ACI is engaged in the production of steam and metallurgical coal from surface and underground mines. Mega funds added a net $287 million to their $1.10 billion prior quarter position, and taken together mega funds hold 22.8% of the outstanding shares, more than their 12.7% weighting in the group. The top buyers were T Rowe Price ($57 million) and Vanguard Group ($45 million), and the top holders among mega funds were T Rowe Price ($417 million) and Vanguard Group ($178 million). Overall, 409 institutions hold 82.1% of ACI shares, with T Rowe Price and Vanguard being the top holders with 9.8% and 4.2% of the outstanding shares, respectively.
ACI trades at a forward 6 P/E, at the bottom of its historic P/E range and also at a discount to the forward 9.5 P/E for the Coal group, taken together. Meanwhile, earnings are projected to increase at 57% compounded growth rate from $1.14 in 2010 to $2.82 in 2012. Also, ACI trades at a P/B ratio of 1.1 and a PSR of 1.0, both a discount to the averages of 1.8 and 1.6 respectively for the Coal group. Furthermore, the price target of Wall Street analysts on ACI is $30, well above the current $25 price; and of the 28 analysts that cover ACI, 20 rate it at buy/strong buy, another eight rate it at hold, and none rates it at underperform/sell.
James River Coal Co. (JRCC): JRCC is engaged in the exploration and production of steam, bituminous and industrial-grade coal in Kentucky and Indiana. Mega funds added a net $19 million to their $189 million prior quarter position, and taken together mega funds hold 26.4% of the outstanding shares, more than their 12.7% weighting in the group. The top holders were Wellington Capital Management ($60 million), State Street Corp. ($27 million) and Invesco Ltd. ($25 million). Overall, 151 institutions hold 79.0% of JRCC shares, with Wellington Capital, Steelhead Partners ($43 million) and SouthernSun Asset Management ($32 million) being the top holders with 13.5%, 11.7% and 8.6% of the outstanding shares respectively.
JRCC trades at a P/B ratio of 0.8 and a PSR of 0.4, both a discount to the averages of 1.8 and 1.6 respectively for the Coal group. On a P/E basis, earnings are projected to fall from $2.03 in 2010 to 52c in 2011 to a loss of 10c in 2012. Taking EV/EBITDA as a proxy for earnings, JRCC trades at a 5.5 EV/EBITDA, a discount to the average of 7.6 for the Coal group. Furthermore, the price target of Wall Street analysts on JRCC is $15, well above the current $10 price; and of the eleven analysts that cover JRCC, three rate it at buy/strong buy, another eight rate it at hold, and none rates it at underperform/sell.
Besides ACI and JRCC, mega funds are also bullish about the following two stocks (see table):
Patriot Coal Corp. (PCX): PCX is a leading coal exploration and production company in the Eastern United States, with 14 active mining operations in Appalachia and the Illinois Basin. Its customers include electric utilities, industrial users and metallurgical coal customers, and it controls approximately 1.9 billion tons of proven and probable coal reserves. Mega funds added a net $4 million to their $265 million prior quarter position, and taken together mega funds hold 12.0% of the outstanding shares, slightly below their 12.7% weighting in the group. The top holders were Vanguard Group ($65 million), State Street Corp. ($63 million) and Barclays Global Investors ($37 million). Overall, 246 institutions hold 78.5% of PCX shares, with Chilton Investment Co. ($82 million) and Vanguard Group being the top holders with 7.1% and 4.9% of the outstanding shares respectively.
PCX trades at a P/B ratio of 1.4 and a PSR of 0.5, both a discount to the averages of 1.8 and 1.6, respectively, for the Coal group. On a P/E basis, it trades at a forward 18 P/E based on 2012 earnings of 63c. Furthermore, the price target of Wall Street analysts on ACI is $21, well above the current $12 price; and of the 18 analysts that cover PCX, six rate it at buy/strong buy, ten rate it at hold, and the remaining two rate it at underperform/sell.
Walter Energy Inc. (WLT): WLT produces hard coking coal from underground mines for by the steel industry. Mega funds added a net $206 million to their $1.73 billion prior quarter position, and taken together mega funds hold 25.0% of the outstanding shares, well above their 12.7% weighting in the group. The top buyers were Wellington Capital Management ($123 million) and Vanguard Group ($38 million), and the top holders were Fidelity Investments ($316 million), TIAA-CREF ($236 million), Vanguard Group ($227 million) and Wellington Capital Management ($211 million). Overall, 393 institutions hold 90.2% of WLT shares, with Fidelity Investments and Harris Associates ($250 million) being the top holders with 6.2% and 5.3% of the outstanding shares respectively.
WLT trades at a forward 8 P/E, a slight discount to the forward 9.5 P/E for the Coal group taken together, while earnings are projected to increase at 11% compounded growth rate from $7.41 in 2010 to $9.20 in 2012. Also, WLT trades at a P/B ratio of 2.3 and a PSR of 2.3, both well above the averages of 1.8 and 1.6 respectively for the Coal group. Furthermore, the price target of Wall Street analysts on WLT is $95, well above the current $75 price; and of the 19 analysts that cover WLT, ten rate it at buy/strong buy, eight rate it at hold, and the remaining one rates it at underperform/sell.
The following are coal stocks that mega fund managers are most bearish about (see table):
Alpha Natural Resources (ANR): ANR is engaged in the production, sale, and processing of coal from mines and preparation plants in VA, WV, KY and PA. Mega funds cut a net $211 million to their $3.21 billion prior quarter position, and taken together mega funds hold 27.0% of the outstanding shares, more than their 12.7% weighting in the group. The top sellers were Fidelity Investments ($129 million), Goldman Sachs Asset Management ($100 million) and Deutsche Bank AG ($78 million). Overall, 535 institutions hold 90.0% of ANR shares, with Fidelity Investments and BlackRock Advisors ($253 million) being the top holders with 8.3% and 4.7% of the outstanding shares respectively.
ANR trades at a forward 11 P/E, well above the forward 9.5 P/E for the Coal group taken together, while earnings are projected to increase slightly from $2.17 in 2010 to $2.21 in 2012. Also, ANR trades at a P/B ratio of 0.7 and a PSR of 1.2, both well below the averages of 1.8 and 1.6 respectively for the Coal group. Furthermore, the price target of Wall Street analysts on ANR is $36, well above the current $23 price; and of the 25 analysts that cover WLT, 17 rate it at buy/strong buy, eight rate it at hold, and none rates it at underperform/sell.
Teck Resources Ltd. (TCK): TCK is a Canadian miner of coal, copper, zinc, molybdenum, gold and lead, mainly in Canada, the U.S., Chile and Peru. Mega funds cut a net $254 million to their $4.23 billion prior quarter position, and taken together mega funds hold 12.9% of the outstanding shares, slightly above their 12.7% weighting in the group. The top sellers were Fidelity Investments ($322 million) and Goldman Sachs Asset Management ($53 million). Overall, 535 institutions hold 90.0% of ANR shares, with Fidelity Investments and Blackrock Advisors ($253 million) being the top holders with 8.3% and 4.7% of the outstanding shares respectively.
TCK trades at a forward 7 P/E, well below the forward 9.5 P/E for the Coal group taken together, while earnings are projected to more than double from $2.62 in 2010 to $5.70 in 2011. Also, TCK trades at a P/B ratio of 1.3 and a PSR of 2.1, as compared to the averages of 1.8 and 1.6 respectively for the Coal group. Furthermore, the price target of Wall Street analysts on TCK is $59, well above the current $37 price; and of the nine analysts that cover TCK, eight rate it at buy/strong buy, one rates it at hold, and none rates it at underperform/sell.
Peabody Energy Corp. (BTU): BTU is engaged in coal production and sale through 28 operations in the U.S. and Australia. Mega funds cut a net $145 million to their $5.22 billion prior quarter position, and taken together mega funds hold 28.3% of the outstanding shares, more than their 12.7% weighting in the group. The top sellers were Fidelity Investments ($115 million), Wellington Capital Management ($93 million) and Invesco Ltd. ($81 million). Overall, 671 institutions hold 80.5% of BTU shares, with T Rowe Price ($998 million) and State Street Corp. ($501 million) being the top holders with 8.5% and 4.3% of the outstanding shares respectively.
BTU trades at a forward 8 P/E, below the forward 9.5 P/E for the Coal group taken together, while earnings are projected to increase at 32% compounded growth rate from $3.09 in 2010 to $5.36 in 2012. Also, BTU trades at a P/B ratio of 2.2 and a PSR of 1.5, as compared to the averages of 1.8 and 1.6 respectively for the Coal group. Furthermore, the price target of Wall Street analysts on BTU is $61, well above the current $40 price; and of the 23 analysts that cover WLT, 20 rate it at buy/strong buy, two rate it at hold, and one rates it at underperform/sell.
BHP Billiton Ltd ADR (BBL): BBL that also trades under the ticker BHP, is an Australian company engaged in the mining of base metals, iron ore, oil, gas, diamonds, and coals. Mega funds cut a net $324 million to their $2.19 billion prior quarter position, and taken together mega funds hold 0.8% of the outstanding shares. This is far less than their 12.7% weighting in the group, which is understandable given that this is an Australian company, with probably a lot of the institutional owners outside the U.S. The top sellers were Wellington Capital Management ($124 million) and Fidelity Investments ($45 million). Overall, 611 institutions hold 4.5% of BBL shares, with AllianceBernstein ($960 million) and Fidelity Investments ($725 million) being the top holders with 1.5% and 1.1% of the outstanding shares, respectively.
BBL trades at a forward 9.6 P/E, at par with the forward 9.5 P/E for the Coal group taken together, while earnings are projected to fall from $7.83 in 2011 to $6.46 in 2013. Also, BBL trades at a P/B ratio of 2.9 and a PSR of 2.3, both well above the averages of 1.8 and 1.6 respectively for the Coal group. Furthermore, the price target of Wall Street analysts on BBL is $80, well above the current $62 price; and of the five analysts that cover BHP, three rate it at buy/strong buy, two rate it at hold, and none rates it at underperform/sell.
Consol Energy Inc. (CNX): CNX is a producer of bituminous coal and coal-bed methane gas primarily in the northern and central Appalachian and Illinois basins. Mega funds cut a net $77 million to their $4.66 billion prior quarter position, and taken together mega funds hold 44.3% of the outstanding shares, more than their 12.7% weighting in the group. The top sellers were Wellington Capital Management ($76 million) and T Rowe Price ($26 million). Overall, 456 institutions hold 92.1% of BBL shares, with Wellington Capital Management ($1.13 billion), Capital World Investors ($549 million) and Vanguard Group ($491 million) being the top holders with 12.2%, 5.9% and 5.3% of the outstanding shares respectively.
CNX trades at a forward 11 P/E, above the forward 9.5 P/E for the Coal group taken together, while earnings are projected to increase at 32% compounded growth from $2.22 in 2010 to $3.86 in 2012. Also, CNX trades at a P/B ratio of 2.7 and a PSR of 2.6, as compared to the averages of 1.8 and 1.6 respectively for the Coal group. Furthermore, the price target of Wall Street analysts on CNX is $62, well above the current $43 price; and of the 28 analysts that cover BHP, 24 rate it at buy/strong buy, four rate it at hold, and none rate it at underperform/sell.
General Methodology and Background Information: The latest available institutional 13-F filings of over 30+ mega hedge fund and mutual fund managers were analyzed to determine their capital allocation among different industry groupings, and to determine their favorite picks and pans in each group. These mega fund managers number less than one percent of all funds and yet they control almost half of the U.S. equity discretionary fund assets. The argument is that mega institutional investors have the resources and the access to information, knowledge and expertise to conduct extensive due diligence in informing their investment decisions. When mega Institutional Investors invest and maybe even converge on a specific investment idea, the idea deserves consideration for further investigation. The savvy investor may then leverage this information either as a starting point to conduct his own due diligence.
Credit: Historical fundamentals including operating metrics and stock ownership information were derived using SEC filings data, I-Metrix® by Edgar Online®, Zacks Investment Research, Thomson Reuters and Briefing.com. The information and data is believed to be accurate, but no guarantees or representations are made.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Disclaimer: Material presented here is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion. Further, these are our ‘opinions’ and we may be wrong. We may have positions in securities mentioned in this article. You should take this into consideration before acting on any advice given in this article. If this makes you uncomfortable, then do not listen to our thoughts and opinions. The contents of this article do not take into consideration your individual investment objectives so consult with your own financial adviser before making an investment decision. Investing includes certain risks including loss of principal.
