Coal Stocks Hit Hard In November: Buying Opportunity?

| About: Peabody Energy (BTU)
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Half Way Through November, a Month to Forget for Coal Stocks

November has been a cruel month for coal stocks with a group of nine down an average 22% as of November 16. Included in the group average are Arch Coal, (ACI), Alpha Natural Resources, (ANR), Alliance Resource Partners, (NASDAQ:ARLP), Peabody Energy, (NYSE:BTU), Cloud Peak, (NYSE:CLD), Consol Energy, (NYSE:CNX), James River, (JRCC), Natural Resource Partners, (NYSE:NRP) and Walter Energy, (NYSE:WLT).

Is November's sell-off due to Obama's reelection or is the market using that as an excuse to take profits? It's hard to say. However, even after an average 22% decline these stocks remain on average 22% above their 2012 lows. Volatility in the coal space is alive and well. Is the tide about to turn? I doubt it.

In addition to Obama's reelection there are other events moving these stocks. The fiscal cliff is no doubt a factor, as is talk of a carbon tax and this is the time of the year when tax-loss selling strategies start to kick in. Finally, European headlines can't be helping.

Arch, Walter and Alpha Sending Signals

It may not be necessary to parse the news so carefully. This week Arch and Walter announced new bond deals. Arch's bond is a $375 million 9.875% coupon deal issued at a discount to yield 10.75%. This comes two months after Alpha issued $500 million 9.75% notes at a discount to yield 10.0%. On Friday, Walter issued $500 million 9.875% notes.

These costly bond deals signal extreme caution. Even after substantial production cuts to stem losses, these issuers must see nothing but trouble next year. If true, November's sell-off is justified. In fact, given that coal fundamentals are not improving and no one knows how much longer the downturn will last, we could be seeing a sector rotation out of coal.

Rotation or not, the signals sent by Arch, Walter and Alpha and the recent plunge in James River's stock are spooking the market. Investors may want to keep some dry powder. If I'm wrong, I don't see catalysts to drive the stocks significantly higher this year. Having said that, I admit to missing short-term rallies from time to time. Actively trading the coal stocks is not my game.

Readers of my articles probably know by now that there are two exceptions to my cautious views, Alliance and NRP. Please see these recent pieces here and here

Disclosure: I am long ARLP, NRP. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.