The average coal mining stock, as represented by the Market Vectors® Coal ETF ($KOL), is marginally down YTD after a crippling 33% loss in 2011. The group has been hammered over falling demand due to both the weak global economy as well as competition from cheap natural gas and renewable fuels as a source fuel for electricity generation by utilities.
However, the group is cyclical, and as counter-intuitive as it may seem, often the best time to invest in such groups is on a contrarian basis. In other words, as bad as the news is, much of that is most likely baked into the prices of coal mining stocks, and the risk given the recent steep fall in the group may be to the upside if any of the negatives cited above reverse themselves, even to a measured degree.
In this article, via an analysis based on the latest available Q4 institutional 13-F filings, we identify the coal mining companies that are being accumulated and those being distributed by legendary or guru fund managers, such as Warren Buffet, George Soros, Carl Icahn, Steven Cohen and Mario Gabelli, that are well-known for their savvy in picking winning stocks year after year. Taken together, these guru managers are bullish on the coal mining group, adding a net $102 million in Q4 to their $1.64 billion prior quarter holdings in the group (for more general information on these guru funds, please look at the end of the article).
The following are the coal mining companies that these guru fund managers are most bullish about (see Table):
Walter Energy Inc. (WLT): WLT is a producer of hard coking coal from underground mines for by the steel industry. Guru funds together added a net $115 million in Q4 to their $423 million prior quarter position in the company, and taken together guru funds hold 13.5% of the outstanding shares. The top buyer was billionaire James Dinan's event-driven hedge fund York Capital Management ($94 million), and billionaire star fund manager Stephen Cohen's hedge fund SAC Capital Advisors ($39 million), and the top holder was Chicago-based Harris Associates LP, manager of the Oakmark Funds ($277 million).
WLT reported its Q1 (March) quarter after the market close today, on Wednesday, missing on both analyst revenue and earnings estimates, but maintained its FY 2012 full-year coal production target at 11.5 -13.0 MMTs. Its shares currently trade near 52-week lows, and are up about 5% YTD, trading at a discount 9-10 forward P/E and 1.9 P/B compared to averages of 12.3 and 1.6 for its peers in the coal mining group. Also, analyst are bullish on the company with a mean target of $79, well above current prices in the $64 range, and of the 22 analysts that cover the company, 13 rate it at buy/strong buy, eight at neutral, and only one at underperform.
Peabody Energy Corp. (BTU): BTU is engaged in coal production and sale through 28 operations in the U.S. and Australia. Guru funds together added a net $63 million in Q4 to their $187 million prior quarter position in the company, and taken together guru funds hold 3.0% of the outstanding shares. The top buyers were legendary billionaire investor Ken Griffin's Chicago-based hedge fund Citadel ($33 million) and San Francisco, CA-based mutual fund company RS Investment Management ($24 million), and the top holder was RS Investment Management ($153 million).
BTU reported a good Q1 (March) quarter two weeks ago, missing on revenues, but handily beating analyst earnings estimates (67c v/s 54c). Its shares are slightly up since the report, but still trade near 52-week lows, at 8-9 forward P/E and 1.5 P/B compared to averages of 12.3 and 1.6 for its peers in the coal mining group. Also, analysts are bullish on the company, with 23 of the 29 analysts that cover BTU rating it at buy/strong buy, another five rating it at neutral, and only one at underperform. They have a mean target of $43 on the stock, well above current prices in the $30-$31 range.
Cloud Peak Energy Inc. (CLD): CLD is a producer of coal in the Powder River basin through three wholly-owned surface coal mines in WY and MT. Guru funds together added a net $5 million in Q4 to their $38 million prior quarter position in the company, and taken together guru funds hold 4.7% of the outstanding shares. The top buyer was Citadel ($5 million), and the top holders were Schneider Capital Management ($25 million) and SMid-cap focused value investors Keeley Asset Management ($11 million).
CLD reported its Q1 (March) quarter on Monday, missing on revenues, but earnings coming in-line with analyst estimates. Its shares trade at a discount 6.0 current P/E on a TTM (trailing-twelve-month) basis and 1.2 P/B compared to averages of 8.2 and 1.3 for its peers in the coal mining group. Of the 18 analysts that cover the company, eight rate it buy/strong buy, nine at hold, and the remaining one at underperform; and they have a price target of $22 on the stock, well above current prices in the $15 range.
The following are some additional coal mining companies that guru fund managers accumulated in Q4 (see Table):
- BHP Billiton Ltd ADR (BHP) and BHP Billion Plc ADS (BBL), that is an Australian company engaged in the mining of base metals, iron ore, oil, gas, diamonds, and coals, in which guru funds together added a net $45 million in Q4 to their $600 million prior quarter position in the company; and
- Patriot Coal Corp. (PCX), a leading coal exploration and production company in the Eastern United States, with 14 active mining operations in Appalachia and the Illinois Basin, in which guru funds together added a net $2 million in Q4 to their $7 million prior quarter position in the company.
Besides these, guru fund managers based on their Q4 trading activity indicated that they are bearish on the following coal mining companies:
- Consol Energy Inc. (CNX), a producer of bituminous coal and coal-bed methane gas, primarily in the northern and central Appalachian and Illinois basins, in which guru funds together cut a net $105 million in Q4 from their $185 million prior quarter position;
- Teck Resources Ltd. (TCK), a Canadian miner of coal, copper, zinc, molybdenum, gold and lead, mainly in Canada, the U.S., Chile and Peru, in which guru funds together cut a net $17 million in Q4 from their $28 million prior quarter position;
- Arch Coal Inc. (ACI), that is engaged in the production of steam and metallurgical coal from surface and underground mines, in which guru funds together cut a net $4 million in Q4 from their $53 million prior quarter position; and
- Suncoke Energy Inc. (SXC), the largest independent producer of high-quality metallurgical coke in North America, in which guru funds together cut a net $3 million in Q4 from their $17 million prior quarter position.
Credit: Fundamental data in this article were based on SEC filings, Zacks Investment Research, Thomson Reuters and Briefing.com. The information and data is believed to be accurate, but no guarantees or representations are made.
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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.