Coal and Steel Stocks Take A Hit

Coal and mining companies have been some of the top performing stocks this year, but since the start of July (1 and a half trading days), many of these names have gotten hit with declines of 10% or more.  As shown below, Massey Energy (MEE), which was the top performing S&P 500 stock at the end of the second quarter, is down 14.05% in July.  James River Coal (JRCC), which was the top performing Russell 3,000 stock at the end of June, is down 13.43% in the last two days. 

This big selloff in the top performing names indicates that money managers and other institutional investors were most likely holding onto these names for window dressing purposes through the end of the quarter, only to take profits in them at the first chance they had.  Investors that have been waiting to get into these names on a pullback might want to take a look at them now.

click to enlarge

Comments

[jimmy46:]

"""Investors that have been waiting to get into these names on a pullback might want to take a look at them now."""

Buying momentum stocks after they peaked and are on the way down is a sucker trap.
The worm has turned, now the momentum is down.

2008 Jul 02 03:13 PM

[pockyclips ...:]

Wonder if Olympics has anything to do with it? China will be cutting back on production in Peking (sorry, old school GI) to lighten up on pollution. Expect coal and steel down in July and early August.
Not to mention our own automotive industry cutbacks.

2008 Jul 02 03:19 PM

[SDIMGR:]

This may be a factor why the coal mountains came tumbling down today. ouch!
www.marketwatch.com/ne...

2008 Jul 02 06:19 PM

[nycDem:]

Uh...SDIMGR, that article you cite is a year old.

2008 Jul 02 11:48 PM

[Coallover:]

Hi, I am newbie and invested mostly on coal and ag stocks. I have lost $2000 today in paper. Please advice if what strategy I need to do for tomorrow.

2008 Jul 03 01:01 AM

[Greg Ripka:]

Window dressing has nothing to do with the sell-off in coal equities. Evidence this explanation is spurious, can be found in the 7/1 price of these equities. The first day they could have been sold if they indeed were window dressing, collectively, these equities were all near there highs.

The reason coal equities sold off on 7/2 is a function of coal's price.

The impetus was Asian utilities reluctance to pay $220 per ton for seaborne thermal coal, when last week they had paid $170 per ton. Notably, the transactions where completed at $200 per ton.

More significantly, NYMEX futures on the Central Appalachian contract closed down roughly 9% on the day dropping from $143 per ton to $130 per ton. In London, API2 coal swaps were off by as much as $24 on the day. European benchmark coal also dropped on the order off about $25 per ton. This correction has been anticipated given the rate at which prices have increased over the past month. Fundamentals remain intact, namely the growing supply imbalance which has driven the phenomenal growth in these Companies values.

Reaction to these price drops was so severe because this is the first sign of anything remotely resembling weakness in the coal market. The result is coal equities are oversold and at these levels represent a great entry point.

2008 Jul 03 01:32 AM

[nycDem:]

Greg, thanks for that great post. I agree with you, although I haven't looked at the specific data driving today's sell-off. However, based upon my research over the last few months, the coal story is very much still intact.

As an example, ACI is expected to grow at nearly 40% year-over-year for the next five years. (2nd qtr earnings are due on July 23rd).

Today's drop was pretty dramatic, but I will be surprised if we don't bounce back in short order.

I agree that this is a buy signal, but the market is pretty high-strung right now so I'm going to wait to see what happens tomorrow. We could get another down day.

2008 Jul 03 02:01 AM

[Mark Anthony:]

I have warned about the coal sector, just a few days ago. And few people paid attention? Read below about why the coal bull has run too far too fast:

seekingalpha.com/artic...

2008 Jul 03 02:57 AM

[User 220541:]

Lots of mitigation issue for MEE. Don't see this one rising as drastic as it did before. Expect it to fall further. Everyone is bailing out. Lost $17, yesterday alone.

2008 Jul 03 07:12 AM

[blink0404:]

as the market continues to go down, coal, which used to be a safe haven, now looks like it may be subject to a downward trend. Here's a pretty good podcast that discusses what to during this down market and what's going on with coal, steel, bulk shipping, and agriculture.

the main idea is that individual investors dont have to act like institutional investors and this market and may be better holding cash than trying to beat the market.
www.greenfaucet.com/sh...

2008 Jul 03 12:21 PM

[jjason:]

Coal stocks were way overpriced. And maybe consumers of coal decided prices were too high too.

Oil is next...I hope.

2008 Jul 04 05:04 AM

[miamistorm:]

Some readers of this forum seem to believe the China story is all over after the Olympics ends. Don't fool yourselves about the China growth machine. The Chinese coal and steel stocks (ex. GSI) have bright futures ahead. With the Chinese economy growing on average at between 10% to 12% annually for at least the next 5 to 10 years the global slowdown is a little more than a speedbump for this ancient nation. Let us not forget that when the Olympics end preperations for the World's Fair in Shanghai begin. By some well respected estimates China will spend nearly as much on the World's Fair event as they did for the Olympics. I agree with the reader who wrote that 'now is not the time to buy momentum stocks' as the momentum is down and it's a little too late to buy these dubvious 'bargains' here in the developed world but in the emerging world of China their steel and coal stocks are where US Steel was at the begining or our industrial revolution. How many of us, given the chance, would buy US Steel when that company was only several years old?

2008 Jul 05 08:16 AM

[guliamo:]

There are 4 main reasons for buying FDG in my opinion:
1. Coal is a raw material in high demand and this Canadian trust has plenty of it.
2. Canadian law gives energy trust a nice tax break. As an REIT the company passes this benefit on to investors.
3. The Canadian dollar is stronger than the US currency so this position will also shelter against the state the dollar is in.
4. annual dividend of 11%

2008 Jul 08 08:18 AM

[Paula Johnson:]

Agree Sell off is profit taking, supply and speculation.
Buy low sell high works for me.
For those worried about China here is a nice story:
China On Brink Of Electricity Shortfall - FT
Last update: 7/16/2008 6:46:37 PM
TOKYO (Dow Jones)--China faces its worst power shortage in at least four years as soaring coal prices and government-set electricity tariffs force dozens of small power plants to shut down rather than face mounting losses, the Financial Times reported Thursday. Nearly half of China's provinces have started to ration electricity as the country enters the peak summer season, facing what analysts describe as its worst coal shortage, the paper said. Analysts warn this year's electricity shortfall could be more severe than in 2004, when the country was affected by its worst power shortage ion decades because of soaring demand for power as the economy boomed. Coal prices in China have double since the start of the year. Beijing last month imposed price controls on thermal coal bought directly from mines but spot market prices continued to rise. About 38% of China's coal supply last year came from small-scale operations. Many of these have since been closed by the government in an attempt to improve safety conditions in the sector, the FT said.
Remember to purge your portfolio of any stocks that will be shut down due to Chinese pollution laws prior to the Olympics or be ready to pick up a few companies that will not benefit from this law and will see their shares falling.

2008 Jul 16 10:52 PM

[mccsva:]

Just bought 1000 shares of CNX today at $59.50-about 1/2 the stock price of 5 weeks ago.
I think within 12-18 months the price will be close to $100.

2008 Aug 12 01:23 PM

[mccsva:]

I just bought 1000 shares of CNX at $59.50-about 1/2 the share price of 5 weeks ago.
Think it will be a good long term (18 months-3 years) play.

Anyone agree / disagree ?

2008 Aug 12 01:25 PM