Coal is the Next Fertilizer

As I keep saying, the coal sector is a lot like fertilizer when analysts had no clue about the earnings potential. I wrote in October just how wrong these guys, who do this for a  living and focus on only 1 sector, were about fertilizer, [Oct 23: Analysts Still Doubting the Fertilizer Stocks - I'm Adding Potash Ahead of Earnings] and I'm writing the same thing nowadays about coal [May 5: Alpha Natural Resources Booming Earnings - Just the Start] and [May 1: Walter Industries - the Most Amazing Company].

I continue to be amazed that guys who follow a sector 24/7 for their career miss some of these things, that random future mutual fund managers who follow countless sectors (instead of only 6-8 stocks) can see clearly. Maybe it's the lack of a MBA that allows one to see reality? Or not having to worry about my $5800 NYC monthly apartment rent? As is typical "they" are now upgrading stocks after a 40-50% move up in the last month. Excellent timing again.

That said, I'd really appreciate a pullback here, please? [May 21: Coal - Just Amazing]. These stocks continue to just be on fire with another sector wide move, led by our top dog Alpha Natural Resources (ANR) up nearly 10%. Days like this, I hate the fact I sold any along the way.

• Coal stocks traded mostly higher Wednesday as a UBS analyst lifted his rating on one of the world's largest producers to "Buy," suggesting the company has some unrecognized potential to take advantage of soaring coal prices.
• Analyst Shneur Z. Gershuni raised shares of Peabody Energy Corp. from "Neutral," saying the company should benefit from better-than-expected coal prices next year. (late... to... game?)
• The company's exposure to metallurgical coal and its production in the Illinois Basin is "under appreciated by the market," the Gershuni said. Gershuni estimates the two markets make up 15 percent of Peabody's total production, but could account for as much as 45 percent of the producer's earnings if prices soar as expected next year.
• Gershuni raised 2009 earnings per share estimates on the company to $6.59 from $4.49. The current average estimate of analysts polled by Thomson Financial is $4.64. Gershuni also raised his price target on the stock to $86 from $67.
• Gordon Howald, an analyst with Calyon Securities Inc., said rising coal prices, especially in China, will likely spur growth for a number of U.S. producers. He recommends investors buy shares of Arch Coal Inc., Foundation Coal Holdings Inc. and Peabody.
• "We continue to believe the coal market has legs as we head into 2009," he wrote in a client note.

Now I did flip out Peabody Energy (BTU) for Alpha Natural Resources back in April (always been a big fan of Peabody though due to Australian exposure) [Apr 8: Changing Coal Allocation - Peabody Energy Out - Alpha Natural Resources In], just so I wouldn't have a portfolio full of coal companies (I have 4 pure plays, and 2 sorta coal plays), but frankly throw a dart and come back in a year and make money. That said, swapping BTU for ANR was a prescient call - click here to see a comparison the past 3 months. But I'm trying to make the most money as possible, hence my specific choices - on this one not only did we get the right boat, but we got the perfect seat as well. 

If you don't know the individual companies you can always go to the ETF KOL [Jan 14: New Coal ETF (KOL) Introduced from Van Eck Global].I'm not chasing these names after such epic moves, but with what I have left I am just sitting and watching with glee and when any related name pulls back, as did Mechel (MTL) last Friday, I throw in a new layer of purchase. (up 14% since we bought Friday).

One day these will correct; when it happens we will ignore the white noise spewing from TV how the story is over and be buying hand over fist - coal is really a 2009 story, not a 2008 story; which makes the current move all the more marvelous.

Disclosure: Long Mechel, Alpha Natural Resources, Arch Coal in fund; long Mechel, Alpha Natural Resources in personal account

Comments

[pachanguero]

Outstanding Mark! You are the best that this site has to offer!

[Maluman]

I am heavily invested in RIO, which is a strong steel play since it mines iron ore. Would this make it a bad idea to invest in coal since metallurgical coal is used in steel too? Or should I pick speicifically the non-metallurgical coal plays? Or should I just stay away altogether.

[TraderMark]

Thanks Pachanguero; I get a lot of grief on this site since most people have a timeline of 2 hours instead of 2 months. Plus everyone makes perfect trades except for me apparently :)

Maluman you have to do what is best for you. My general advice is to layer in (and out) of positions, buy in pieces. But I would personally not chase huge runs like this - in fact I've been cutting back the past 2 weeks. I'll be buying on the next major pullback.

I like RIO for iron and own it as well. CLF as well.
met coal is just getting started.

[jaimefpozo]

Pachanguero (Colombiano I guess) Yes! this guy Mark is good and I like how he beats up the so called experts. However, I would like him to include WTN.TO in his comparaison chart. That may bring second thought on his preference.

[poet1]

so, is it too late to get in today? wait for a dip? or just get in right now?
and- which is best at this point, ANR ACI or MACDF?

[pachanguero]

Si yo soy Colombiano/Americano

But I am AMERICAN %!100!I love the USA!

Hey Mark PBR? What are your thoughts?

[pachanguero]

Hey do you think Met coal will be the next driver of the coal stocks? If so...who is the best play?

And what do you think of ICO? They just got a new mine that will be on line in one year. They look to be breaking out.

Again, nice stuff you write.

[lhuppcap]

I don't know what effect the Presidental candidates will have on coal stocks. I read somewhere McCain and Obama (assuming he officially becomes the democrat leader) are against coal and more for clean energy so maybe any comments they make will cause a short term blip since the demand is not just in the US.

No doubt coal stocks have had a great run. I think they can still run. The only problem I have is they have gone up alot in such a short period. GCE and WTN in Canada are 9x and 4x baggers since mid January. ANR and WLT are triples since mid January. Like any mania there has to be a short term correction ie. profit taking. I just don't want to get in and see these stocks go down 30%. I rather buy them down 30%. I have been burned too many times buying high. Of course I thought GCE in March was high after having tripled in 2 months and since March it has tripled again. But I have to believe GCE won't triple or even double again until it has a correction. It just seems too crazy now to buy into these stocks in the short term.

[Ben Barnald]

It's all about energy crisis and USD fluctuation. Thursday 29 May was a test when Oil dropped by around $4, USD picked up against most currencies, and most US-denominated commodity stocks went down. Most Coal miners stock went down by average of 2.2%, so was KOL ETF. BHP dropped the most. I'm not sure if oil price can go beyond USD150/barrel as that will drive food and basic needs price to "unaffordable region" in most countries. However, if that happen coal stocks bubble will burst.

In US at the moment, most coal stocks have gone up ranging between 5 % and 11% of their 50 days moving average or between 14.5% and 33.7% of 200 days average price. ANR is exceptional. It has gone up more than 100% of its 200 days-average price. Yes, this is commodity and coal time but it certainly has its very tangible limit. I would say short term investment in this area is safer.

[resourceman]

Nice piece Trader Mark. I agree that COAL is a 2009 story, and on and on ! Our government is in complete denial on coal & yes, the next admin. will probably also have their head in the sand. Plentiful coal , I believe, could be the bridging commodity we will use for power generation until we finally accept that nuclear power in the best energy source-- who would have believed that those crazy frenchmen could figure this out long ago--now they,re off the fossil fuel habbit. There are viable technologies currently available to clean-up coal for power generation. I live near Tucson Az. where our largest power company , AEP , uses coal. I,ll bet most of my fellow Arizonans don,t even no that. You can see these huge unit trains of 90 cars full of coal arriving regularly--and we don,t really have a pollution problem here. Liked your comments on THE ANALYSTS. They generally missed this move in coal stocks. What really gals me is they,re habit of setting a price target on a company,s stock , and when it reaches that price they brand it " overpriced " and downgrade it on valuation--What Nerve ! The thought that it could rise above MY PREDICTION is inconseivable. I too own ANR , ICO , WTN.TO & CBM.L ( which owns 45.7% of Wtn.To.) for the long term.

[Saffie]

Mark what is your view regarding the seemingly low PE of Grande Cache Coal compared to its peer group? I realize that the company almost went under however due to the huge increase in the metallurgical coal price, this company will be turning out decent earnings going forward.

[Coallover]

Is it still time to get in or too risky already? If time to get in, which are your recommendations?