James River Coal: Now Might Be A Good Time To Go To Cash

Jun.25.12 | About: JAMES RIVER (JRCCQ)

Since I wrote my article "Patriot Coal Shareholders Should Switch To James River Coal", the performance differential between Patriot Coal (PCX) and James River Coal (JRCC) has been brutal. While Patriot Coal fell 10.6% from $1.41 to $1.26, James River Coal went up 67% from $1.94 to $3.24.

At this point, those who implemented the idea might be well served to take another step, which is to go to cash (by selling JRCC).

Why?

Even if we believe that longer term coal (NYSEARCA:KOL) will come back, in the short term the most likely course of action is that Patriot Coal will see covenant breaches and wild speculation that it might be about to file Chapter 11. Or indeed, that it will simply file Chapter 11.

Now, even though by being in JRCC investors are in a safer position and will likely avoid any default over the short term, this still leaves them open to downside risk. And let us be clear about this - if and when Patriot Coal files or is rumored to file Chapter 11, James River Coal's shares will be punished as being "most likely to file next".

So for James River Coal shareholders that just managed to wipe out a good part of their losses by doing the suggested switch, it would probably be a good tactic to step aside from the stock temporarily, even if they intend to - longer term - be on it.

Conclusion

Having had the chance to minimize losses on the riskiest coal stock, Patriot Coal, James River Shareholders are now presented with the chance to go to cash while they wait for Patriot Coal developments. When these developments happen, and if they still wish to have exposure to the riskiest coal spectrum, they can then buy back into James River as it gets punished due to Patriot Coal's travails.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.