With an economic turn down in China affecting the mining industry, stocks that supply equipment to this industry can lose business quickly. Joy Global is one of these companies that we would be hesitant to invest in long time at this point but the company does offer a nice short term income opportunity.
Joy Global Inc. (JOY) manufacturers and services mining equipment for extraction ore various types of ore. Whether above or below ground equipment, the company produces and services them world wide. Underground equipment brings in more revenue, about 53% total for the company.
UBS downgraded the stock at the end of March, recognizing what was happening in the economy. (20% to 30%) of Joy's sales come from U.S. coal end markets. There is a combination of two things in the states that will have a negative impact upon the coal industry and thus upon Joy Global as an equipment supplier. First the mild winter has caused a low usage of electricity in the U.S. thus stockpiling more coal than usual. This is one thing that will cut down coal production. The second thing is the low price of natural gas. This is causing utilities to switch over from coal to gas. This is another contributor to lower usage to coal.
Joy Global was a very strong growing company for two years as it grew from May 2010 when it traded at about 22 until it climbed to a high of around 100 in February 2011. Since that time, it has not moved but has traded in a peak and valley formation with a very light bearish lean.
There is money to be made with this stock but we do not believe a long term investment is the way to get yet. Between the low natural gas prices and economic slowdown in China that has affected the mining industry, using options may be the best way to make money with this stock right now.
It has been trading in a zone and appears to be at the bottom of the zone now. One would expect it to move up, but we are not so sure yet. We would look at a Bear Put Spread here for a short term income trade.
The Options Trade
Presently trading at $76.53, we are going to play the trend and go with a Bear Put Spread.
- Buy a July 2012 75.00 call (priced at $6.05)
- Sell a July 2012 72.50 call (priced at & 4.85)
- Net Debit to Start: $1.20
- Maximum Profit: $1.80
Joy Global will be a strong long term investment once economic conditions pick up and natural gas prices rise. Until then, an investor can take advantage of short term income opportunities.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.