Alpha Natural Resources (ANR) has been well nigh "killed" recently. It's one of the worst performing stocks in the entire S&P 500 and it's not hard to see why. The fundamentals of this stock are not good at all. Natural gas is still close to all time lows (despite the 50 cent rally), China is slowing rapidly, and there are rumors of bankruptcy for Patriot Coal (PCX). A lot of coal bulls who were praising coals fundamentals just a year ago have given up. It seems that everyone thinks that coal powered energy plants are a thing of the past.
From a long-term perspective, the situation is not as dire as the stock price indicates. Natural gas prices will eventually go up once more LNG export facilities are built. China and India will still need metallurgical coal to build their cities. If Patriot Coal does go bankrupt, it means one less competitor and more plants shut down.
Like many other sectors, natural resource stocks are cyclical. When times are good, resource companies make a lot of money and build new plants. The new plants increase EPS until the resource price finds an equilibrium. When times are bad, the same companies lose money and pare plants. Eventually the reduction of plants reduces supply so much that the resource price goes up again and the company starts making money.
Typically, the smart money buys strong companies during the latter stages of the contraction phase and sells at the beginning of the expansionary phase. Smart money knows that no matter what happens, its strong companies will survive and when the expansionary cycle begins, its positions will enjoy a lot of upside.
Since it is really hard to know the exact end of a cyclical phase, the real question is whether Alpha Natural Resources is a strong company relative to its peers.
There is no question that because of ANR's weak balance sheet and tendency to acquire, Alpha Natural Resources is not one of the leaders. Buying Alpha Natural Resources is much more speculative than buying a strong company such as Walter Energy, Inc. (NYSE:WLT) or Peabody (BTU). But because of ANR's low stock price, the risk reward of buying ANR for the long term might not be as bad. If ANR does survive, the stock could triple or more when the expansionary phase begins.
The technical picture looks really bad right now. All moving averages are down. The key levels for ANR are 10, 11, 11.70 on the upside, and 8 on the downside. ANR has been so weak lately that it has almost always failed to close above resistance. However, with Goldman Sachs saying QE3 might be announced as soon as the next FOMC meeting, it might be 'risk on'. In that event, even dead cats will bounce and with the horrendous negative sentiment in the coal sector, there might be a short squeeze coming.
The long-term fundamentals of coal are not as bad as what they may presently seem. Because of the present macro events in China and structural rebalancing occurring with Natural Gas, demand of coal has gone down and taken coal prices with it. Coal producers are beginning to respond by paring plant numbers. Eventually coal prices will find an equilibrium where coal producers can still make a healthy profit. When that time comes, the sector leaders of coal will benefit. Alpha Natural Resources might be one of them.
Disclosure: I am long ANR.
Additional disclosure: I think it is very speculative, and only playing for the bounce.
Disclaimer: The aforementioned material is not investment advice and you should make your own conclusions before investing.