Reducing Coal Position As Hedge Funds Punish the Sector 8 comments
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This is the 2nd/3rd of 4 coal stocks we are exiting, for reasons I outlined last week in the sale of Alpha Natural Resources (ANR). There is no reason to hold 4 names, when quant hedge funds who pile in and out of these stocks on 'sector' moves see no difference between each business. Arch Coal (ACI) = Peabody Energy (BTU) = Massey Energy (MEE) = insert any coal name or in fact any commodity name.
So to keep life simple we are reducing positions and due to the fact this is a traders market and not an investors market we are simply going to use James River Coal for our "coal" stock, or in reality our natural gas/iron ore/oil/corn/coffee/steel stock. It's all the same to the hedgies.
Again, I think coal is being vastly underestimated by this market - unlike oil and natural gas, the prices have held steady during these past few months of commodity correction. That was my thesis for overweighting coal and fertilizer as opposed to oil and natural gas. I thought the market would discern among the groups and reward stocks of companies whose underlying commodity had held up. But the market lacks logic and anything within 6 degrees of oil is considered either "bad" or "good" - depending on which way the wind is blowing that day. Despite each individual sub-sector's pros and cons. It makes little sense to me but that is the current logic of the market where people pile in and out of broad sectors as opposed to more detailed analysis of individual companies or slivers of the sector. Until that changes we are going to do the same and use 1 stock for our proxy.
I've been waiting for Massey Energy (MEE) and Walter Industries (WLT) to lift so I can sell and we can go to a more streamlined approach. My one worry is that any and all of these companies are potential buyout candidates and in a moment's notice could be taken out at a 30-40% premium.
Massey Energy (MEE) was started on Nov 15, 2007 and we have a $5K gain in the name, we are selling today as the stock has put a 44% move on in the past 3 sessions. I am aghast at the low valuation in this name and others in the sector but this is a market of forced liquidations. Again this highlights how tough this market is - if you bought 1 week too early you are getting a 0% return. If you nailed the bottom you made nearly 50% in a few sessions. If you bought 3 weeks too early you are down 30%. The odds are simply not in your favor in this market as an "investor". Today we sold the 1.5% stake in the mid $45s. I could see upside to potentially $50 but won't get greedy.
Walter Industries (WLT) has held up better than the other coal stocks because it is not a 100% pure play on coal - it also has a housing arm. Sadly, that has probably helped keep the stock standing on a relative basis versus peers. We started this position on Jul 2, 2008 and after having a very nice unrealized gain to begin with leave with a $11K loss in the name. The stock has retraced from $55 to $67 where it now faces resistance of the 200 day moving average. If this is a new bull market (rotation from hedge funds) into commodities we should see it move over and above this level shortly. I will have my doubts until proven otherwise. Today we sold the 1.4% stake near $67.
Again for now James River Coal will be our "one position" that represents the 4 stock basket we used to own. This will make the "trading" necessary to survive in this market easier than trying to trade 4 positions. Another option is of course simply buying the coal ETF (KOL) [New Coal ETF (KOL) Introduced from Van Eck Global]
One day I hope to purchase stocks based on fundamentals again instead of hedge fund movements.
Disclosure: Long James River Coal in fund; no personal position.
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This article has 8 comments:
jegan ;- )
Careful. Right now KOL is trading at a significant premium NAV to the underlying. This has all happened only since the beginning of Sept.. The logical trade going forward is for the hedge funds to soon flip and short KOL and go long the underlying components. This trade will make money even if both sides decline as long as the KOL goes down more than does the component parts.
WLT is spinning off the mortgage business, to become a pure coal play.
At this point, I'm hoping that we have seen the worst of the hedge fund liquidations. The earnings from BTU and the forward guidance would seem to indicate that the entire group is now undervalued.
Good call, Trader Mark.
I'm bullish here at these levels (well I was Thursday and Friday) some of these names are up 30% already. Also fertilizer. These will probably be trading vehicles for the better part of the next year and then mid 2009 forward I think the next sustained move (by that I mean multi month moves) as the rest of the world begins to rebound (America will still be struggling) and the market begins to anticipate it.
BTU results were stellar.
I think hedge funds will have 1 more round around December and then many will simply close up shop since it will take 2-3 years of profits to make up for this year, so their effect will be far less important after Jan 1.