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Investors would do well to follow some of the suggested guidelines when it comes to looking for new investment ideas. These are not absolute rules. They are just suggestions and there are always exceptions to the rule. The goal is to try to satisfy as many of them as possible.

It is important that readers take the time to read and understand the selection process involved in coming up with these picks. This information can be accessed here "Our suggested guidelines when searching for new investment ideas." Arch coal is not your typical play. It satisfies some but not all the rules. We are listing it here because it could make for a good contrarian play. However, if you are not willing to take on some risk, then consider Freeport-McMoRan Copper & Gold Inc (NYSE:FCX) and ConocoPhillips (NYSE:COP) both of which fulfill the stated criteria.

Reasons to be bullish on Arch Coal Inc (NYSE:ACI):

  • Net income is trending upwards for the past three years even though it dropped in 2011 it is still almost over 100 million higher than it was back in 2009. In 2009, it stood at $42 million in contrast to $142 in million in 2011.
  • A free cash flow yield of 4.87%
  • A 3-5 year projected EPS growth of 11.8%
  • A five-year sales growth of 11%
  • EBOTDA has increased from $450 million in 2009 to $824 million in 2011.
  • Cash flow has increased from $2.41 in 2009 to $3.14 in 2011
  • Strong institution support, percentage held by Institutions is 79%
  • A decent quarterly earnings growth rate of 19%
  • An operating margin of 9.44%
  • A yield of 2.00%
  • A good current ratio of 1.55
  • Percentage short of float stands at a high 24.3%, making it a perfect candidate for a short squeeze.

Arch Coal would fall under the speculative category at this point in the game, so only traders willing to take on some risk should consider this play. As the coal sector has been hammered, the early birds could end up walking away with good returns in the years to come.

Company: Freeport-McMoRan Copper & Gold Inc.

Levered free cash flow = $4.00 billion

Basic overview

  1. Quarterly earnings growth = - 49%
  2. Quarterly revenue growth = - 19%
  3. Beta = 2.3
  4. Operating margins= 40.1%
  5. Profit margins= 19.3%
  6. Operating cash flow = 5.06 billion
  7. Long term debt to equity ratio = 0.35
  8. Cash Flow 5 -year Average = 5.17
  9. 5 year sales growth rate = 14.32%

Growth

  1. Net Income ($mil) 12/2011 = 4560
  2. Net Income ($mil) 12/2010 = 4336
  3. Net Income ($mil) 12/2009 = 2749
  4. Net Income Reported Quarterly ($mil) = 764
  5. EBITDA ($mil) 12/2011 = 10152
  6. EBITDA ($mil) 12/2010 = 10010
  7. EBITDA ($mil) 12/2009 = 7416
  8. Annual Net Income this Yr/ Net Income last Yr = 5.17
  9. Cash Flow ($/share) 12/2011 = 5.95
  10. Cash Flow ($/share) 12/2010 = 5.77
  11. Cash Flow ($/share) 12/2009 = 4.4
  12. Sales ($mil) 12/2011 = 20880
  13. Sales ($mil) 12/2010 = 18982
  14. Sales ($mil) 12/2009 = 15040
  15. Annual EPS before NRI 12/2007 = 4.94
  16. Annual EPS before NRI 12/2008 = 3.43
  17. Annual EPS before NRI 12/2009 = 2.96
  18. Annual EPS before NRI 12/2010 = 4.64
  19. Annual EPS before NRI 12/2011 = 4.84

Dividend history

  1. Dividend Yield = 3.80
  2. Dividend Yield 5 Year Average = 3.10
  3. Dividend 5 year Growth = 5.07

Dividend sustainability

  1. Payout Ratio = 0.37
  2. Payout Ratio 5 Year Average = 0.11

Performance

  1. Next 3-5 Year Estimate EPS Growth rate = 6.9
  2. ROE 5 Year Average = 32.34
  3. Return on Investment = 22
  4. Debt/Total Cap 5 Year Average = 31.21
  5. Current Ratio = 3.5
  6. Current Ratio 5 Year Average = 2.33
  7. Quick Ratio = 2.00
  8. Cash Ratio = 1.71
  9. Interest Coverage = 24.2
  10. Retention rate = 63%

Company: ConocoPhillips

Levered free cash flow = $2.9 billion

Basic overview

  1. Quarterly earnings growth = - 3%
  2. Quarterly revenue growth = - 0.3%
  3. Beta = 1.03
  4. Operating margins= 9.5%
  5. Profit margins= 5.2%
  6. Operating cash flow $21.8 billion
  7. Long term debt to equity ratio = 0.32

Growth

  1. Net Income ($mil) 12/2011 = 12436
  2. Net Income ($mil) 12/2010 = 11358
  3. Net Income ($mil) 12/2009 = 4414
  4. EBITDA ($mil) 12/2011 = 32362
  5. EBITDA ($mil) 12/2010 = 30444
  6. EBITDA ($mil) 12/2009 = 20588
  7. Cash Flow ($/share) 12/2011 = 15.47
  8. Cash Flow ($/share) 12/2010 = 12.52
  9. Cash Flow ($/share) 12/2009 = 10.17
  10. Sales ($mil) 12/2011 = 251226
  11. Sales ($mil) 12/2010 = 198655
  12. Sales ($mil) 12/2009 = 152840
  13. Annual EPS before NRI 12/2007 = 9.21
  14. Annual EPS before NRI 12/2008 = 10.66
  15. Annual EPS before NRI 12/2009 = 3.58
  16. Annual EPS before NRI 12/2010 = 5.96
  17. Annual EPS before NRI 12/2011 = 8.76

Dividend history

  1. Dividend Yield = 5.00
  2. Dividend Yield 5 Year Average = 3.5
  3. Dividend 5 year Growth = 10.9%

Dividend sustainability

  1. Payout Ratio = 0.29
  2. Payout Ratio 5 Year Average = 0.31

Performance

  1. Next 3-5 Year Estimate EPS Growth rate = 1.5
  2. 5 Year History EPS Growth = -8.59
  3. ROE 5 Year Average = 15.89
  4. Return on Investment = 13.51
  5. Debt/Total Cap 5 Year Average = 25.49
  6. Current Ratio = 1.00
  7. Current Ratio 5 Year Average = 1.04
  8. Quick Ratio = 0.60
  9. Cash Ratio = 0.32
  10. Interest Coverage Quarterly = 25
  11. Retention rate = 71%

Conclusion

As the market is still in a corrective phase, there is a good chance it could re test its lows before trending higher. In general, a great way to get into a stock at a price of your choosing is to sell puts at strikes you would not mind owning the stock at. Investors looking for other ideas might find this article to be of interest Seadrill: Grab An Extra 13.3% In 7 Months Or A Lower entry price.

Sources: EPS and Price Vs industry charts obtained from zacks.com. A major portion of the historical data used in this article was obtained from zacks.com. Earnings, revenue and growth estimates charts from dailyfiance.com. Consensus estimate analysis table sourced from reuters.com. Ycharts data obtained from Ycharts.com.

Disclaimer: It is imperative that you do your due diligence and then determine if any of the above plays meets with your risk tolerance levels. The Latin maxim caveat emptor applies - let the buyer beware.

Source: Arch Coal: 1 Of 3 Interesting Plays To Ponder