By Blane Swenson
Any number of reasons could cause a sharp rise in stock price. This is especially true with commodity stocks. One reason could be as simple as a good old fashioned short squeeze. In this situation a large percentage of available stock is held “short,” meaning some investors are betting on the share price to decline. Other investors who like either the company or the stock will try to “squeeze” the shorts by driving the price higher, forcing the shorts to buy back stock at a higher price. Let’s review a few commodity stocks to see if any of them might be short-squeeze candidates.
Kinder Morgan, Inc. (KMI) – At just under $31 KMI’s stock isn’t far from its 52-week high of $32.14. The 52-week low is $23.51. Its price has rebounded approximately 30% from the summer 2011 lows. KMI has approximately 707 million shares outstanding, of which approximately 21.7 million shares are held short as of November 2011. This results in KMI having approximately 3.1% of its total float (the total number of shares publicly owned and available for trading) held short.
KMI’s purchase of El Paso Corp. (EP) will create the largest natural gas pipeline network in the United States. Even before this acquisition KMI was significantly larger than competitors like Williams Companies, Inc. (WMB). This size difference will be even larger now that WMB will be spinning off some of its operations into a separate company.
Contrary to popular belief, size doesn’t always matter. Operating margins of 17.86% and profit margins of 6.12% for KMI compare unfavorably to operating and profit margins of 18.98% and 9.57% respectively for WMB. Despite being smaller, WMB’s gross profit of $2.43 billion this past quarter nearly matched KMI’s $2.54 billion. Having 3% of a company’s stock held short is generally not considered significant. Avoid this stock as a short squeeze candidate.
Molycorp, Inc. (MCP) – MCP stock is down sharply this year from its 52-week high of $79.16. At a current price around $31.55 it has bounced off its 52-week low of $26.88. The company currently has around 83.9 shares outstanding, of which 77.6 million are part of the stock’s float. Thus MCP currently has a short float of 18.2%, which is down sharply from 31.5% in November 2011.
The company has just announced a joint venture to manufacture rare earths in Japan, and is also building a plant in California. MCP, and competitor Rare Element Resources Ltd. (REE), are considered potentially important sources of rare earths as the majority of their competitors are Chinese. China supplies over 90% of world demand for rare earths. China has begun imposing export restrictions on rare earths to keep them within its own borders. MCP and REE are relatively new companies that have sprung up to try and get around those restrictions.
Stock prices for both REE and MCP have declined in 2011 due to significant declines in demand and prices for various rare earth minerals. Still, MCP’s gross margin remains high at 55.61%, operating margin at 36.29%, and profit margin at 30.48%. REE currently has no earnings and therefore no margins. Because of economic reasons, along with the nearly 95% decline in insider ownership the previous 6 months, avoid MCP for now even with the decent sized short float.
AK Steel Holding Corporation (AKS) - At a current price of $8.68, AKS is also trading in the lower end of its 52-week price range. The 52-week high for AKS is $17.88 and the 52-week low is $5.81. The company currently has 110.3 million shares outstanding, of which 108.9 million shares are part of the stock’s float. AKS has a current short float of 23.7%.
AKS and other steel companies are expecting sharply lower earnings in the 4th quarter, including Nucor Corporation (NUE), the largest steelmaker in the United States. While AKS was reporting a loss, NUE was, despite deteriorating conditions, reporting net income of over $627 million and $1.98 per share.
Operating margins for NUE were 6.29% compared with 0.32% for AKS. Return on assets for NUE was 5.34% versus 0.28% for AKS, and year-over-year revenue growth is currently 26.9% for NUE versus 0.60% for AKS. Despite soft market conditions, AKS’s stock price has been inching higher. Combined with the high short float, buy AKS at these levels and especially if it breaks out over resistance around $9.30.
Patriot Coal Corporation (PCX) - PCX is currently down nearly 65% from the 52-week high of $29.20. The 52-week low is $6.92. The company currently has approximately 91.4 million shares outstanding, of which 90.2 million is part of the stock’s float. PCX has a current short float of 14.9%, a slight increase from the month before.
Global economic concerns and competition with natural gas are impacting PCX in recent months, as the company reported a third-quarter 2011 operating loss. Coal prices and production costs have been rising in recent months. PCX and other companies like James River Coal Co. (JRCC) are addressing these issues by cutting back production.
As shown by recent losses PCX hasn’t fared as well as JRCC. JRCC has posted operating margins of 3.64% and profit margins of 1.56% while PCX posted a loss. Return on assets of 2.11% and return on equity of 4.58% for JRCC also compares favorably with PCX in this period. Year-over-year revenue growth this quarter for JRCC is 77.3% versus 17.7% for PCX. With the decent sized short float and stock price creeping higher, buy it at these levels looking for a short-term breakout and recovery in 2012.
ATP Oil and Gas Corporation (ATPG) - ATPG shares are down nearly 65% from the 52-week high of $21.40 in March. The 52-week low in November was $5.53. It currently has around 51.6 million shares outstanding, of which 44.75 million are part of its float. Nearly 18 million shares are currently held short, giving ATPG a huge short float of just over 40%.
We still have some concern with ATPG’s debt load but maintain that this can be overcome with solid production figures out of its Telemark wells. The company’s debt load is extremely high compared with its peers. Continued quarterly losses also impact its ability to pay interest on the debt. A much larger competitor, Forest Oil Corp. (FST) actually has slightly less debt than ATPG does, $1.87 billion compared with ATPG’s $2.02 billion. Thus FST also has a far smaller debt-to-equity ratio, 159.37, compared with 647.06 for ATPG. On the bright side, there have been some sizeable purchases recently by insiders, and any good news could send ATPG sharply higher. I expect a sharp rebound in January 2012. With the huge short float and potential turnaround in 2012, buy ATPG at current levels and especially on any dips.