Oversold Coal Is Primed To Rebound

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Includes: BTU, CLF, CNX, RIO, TECK, WLT
by: David White

In the last few days copper has put in a new 2011 low ($3.07) Monday followed by a near low ($3.08) today -- Wednesday Sept. 28, 2011. In each case it has left a long candlestick tail. This is a strong indicator of likely upward movement soon in candlestick stock charting theory. A double bottom is another strong signal of a likely upward movement soon, although the signal is weaker for having occurred within a three day period. If you put this in the context of the expansion of the EFSF approval process, it may really indicate a turn upward. The Finnish parliament, which had been thought to be a major stumbling block to the approval process, approved the expansion of the EFSF facility today, Wednesday Sept. 28, 2011. The German parliament also approved it early Thursday by a wide margin. This may be enough to change the tune of the market.

On the other hand, the U.S. Initial Claims data and the third estimate of the U.S. Q2 GDP are tomorrow. A particularly bad Initial Claims number could send the market down further. There is also the possibility of some mutual funds and hedge funds wanting to get rid of their losers before the end of the quarter. This could send copper and other commodities and commodity related equities down. While this is possible, the technical behavior of many commodities argues against this. It actually argues that much of this behavior has already taken place. Gold and Silver both hit likely intraday capitulation bottoms on Monday Sept. 26, 2011. Gold hit a low of $1535/oz., and silver hit a low of $26.15. At the time of this writing they are at $1625.90 and $30.81 respectively. Copper looks to have double bottomed (Monday and Wednesday). Many other metals have had similar performance. To me this looks like this is at least a near term capitulation. It means that metals are likely to rebound. It means that coal stocks will likely go along on a general basic materials upswing. Coal contracts are usually much longer term, so it is harder to point to technical charting behavior for them. Some analysts have speculated that coal prices may fall another 20% by July 2012. This may or may not happen. Worse could happen if the EU situation really blows up. For now a bounce looks like the most likely scenario. These stocks are far oversold and undervalued. There is still strong demand. Japanese demand is going to be stronger in 2012. The COALspot.com says China will demand more coal as winter approaches. On Sept. 19, COALspot.com said Chinese buyers were willing to pay $2-$3 more this week compared to last week. The RIO investor presentation below shows a chart of expected longer term energy growth in China.


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Many of the largest coal exporters export from Australia. The following chart shows the approximate distribution of exported coal from Australia. A lot goes to Japan, which one should remember is recovering from an earthquake and ensuing tsunami. It is minus several nuclear power generating facilities. The power generated by those power plants will be largely replaced by coal plant power generation. This means Japan will need more coal. It is unclear at this time whether new nuclear plants will be built anytime soon. This could mean further electricity generating growth could come via coal.


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A few of the stocks that could benefit from this are: Peabody Energy Corp. (NYSE:BTU), Rio Tinto Plc (NYSE:RIO), CONSOL Energy Inc. (NYSE:CNX), Cliffs Natural Resources Inc. (NYSE:CLF), Teck Resources Limited (TCK), and Walter Energy Inc. (NYSE:WLT). The fundamental financial data for these are in the table below. The data shows just how undervalued these stocks are currently. The data are from TDameritrade and Yahoo Finance.

Stock

BTU

RIO

CNX

CLF

TCK

WLT

Price

$35.73

$46.76

$35.62

$55.66

$29.40

$63.11

% down in the last month

26.47%

22.71%

20.35%

31.47%

30.97%

24.24%

1 yr Analysts’ Target price

$71.05

$96.97

$65.05

$122.36

$67.73

$106.70

Predicted % Gain

99%

107%

83%

120%

130%

69%

Annual Dividend Rate

$0.34 (0.90%)

$1.17 (2.50%)

$0.40 (1.10%)

$1.12 (1.80%)

$0.6147 (2.09%)

$0.50 (0.79%)

PE

10.88

5.73

18.06

5.05

9.36

8.48

FPE

6.28

4.70

8.44

3.72

5.24

6.39

Avg. Analysts’ Opinion

1.8

1.6

1.8

1.8

1.7

2.3

FY2012 EPS Estimate

$5.69

$9.94

$4.22

$14.97

$5.61

$9.87

FY2012 EPS Estimate 90 days ago

$5.89

$9.56

$4.38

$14.62

$5.78

$16.10

EPS % Growth Estimate for 2011

29.50%

25.80%

27.60%

79.80%

93.50%

7.80%

EPS % Growth Estimate for 2012

44.10%

11.40%

45.00%

11.30%

10.70%

22.80%

5 yr. EPS Growth Estimate per annum

33.05%

9.00%

26.50%

19.63%

9.20%

24.00%

Market Cap

$9.68B

$90.12B

$8.08B

$8.13B

$17.37B

$3.94B

Enterprise Value

$10.94B

$100.46B

$11.59B

$12.12B

$21.97B

$6.53B

Beta

1.42

1.68

1.53

2.52

3.88

2.20

Total Cash per share (mrq)

$4.62

$4.07

$0.12

$1.63

$2.17

$3.27

Price/Book

1.99

1.47

2.62

1.47

1.07

1.94

Price/Cash Flow

7.57

4.51

7.86

4.42

6.14

6.68

Short Interest as a % of Float

4.86%

0.43%

2.95%

3.49%

0.80%

3.37%

Total Debt/Total Capital (mrq)

32.38%

20.78%

52.40%

37.79%

22.03%

54.94%

Quick Ratio (mrq)

1.84

1.22

0.58

0.78

1.70

1.39

Interest Coverage (mrq)

9.53

--

2.53

21.88

13.74

4.82

Return on Equity (ttm)

19.48%

29.52%

14.38%

35.41%

11.85%

35.11%

EPS Growth (mrq)

37.23%

28.69%

15.54%

52.30%

166.50%

-20.57%

EPS Growth (ttm)

58.26%

73.55%

-6.07%

194.03%

-13.27%

88.26%

Revenue Growth (mrq)

20.86%

18.38%

23.16%

52.48%

27.21%

88.25%

Revenue Growth (ttm)

16.22%

25.59%

18.47%

69.44%

25.03%

65.43%

Gross Profit Margin (ttm)

23.15%

--

35.53%

39.73%

45.37%

47.13%

Operating Profit Margin (ttm)

20.33%

37.94%

10.06%

33.73%

32.00%

30.58%

Net Profit Margin (ttm)

12.45%

28.36%

7.80%

26.58%

19.23%

20.51%

The first five of these stocks all look like good investments. However, the analysts recently revised WLT’s FY2012 earnings estimates downward by almost half. With all of the other available good coal investments, I would stay away from this one until its situation becomes more clear. CNX in contrast recently guided higher for FY2011 results. It cited strong sales to China. Others like TCK, RIO, and CLF have bargain basement multiples. BTU has good multiples, and it is the industry leader. Let’s look at the five year charts to get what guidance we can from the technical factors.

The five year chart of BTU is below.


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The five year chart of RIO is below.


(Click to enlarge)

The five year chart of CNX is below.


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The five year chart of CLF is below.


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The five year chart of TCK is below.


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The five year chart of WLT is below.


(Click to enlarge)

All of these stocks are oversold on their slow stochastic sub charts. All are at or below their lower Bollinger band. All are significantly below their 200-day SMA’s. All seem perfectly set up to bounce upward. I have used the five year charts to show the bottoms in 2008-2009 as a point of reference. I should add that since that time, many governments have acted to curb commodities speculation. The futures exchanges have done the same. This means that there will be fewer sellers if there is a future Black Swan event. In addition these companies have increased production since that time. Keep in mind that China and a number of other countries grew their production capacities during the recession and the ensuing year(s). There should be more profits now for the miners who supply them. The mining companies should have stronger support at higher price levels.

All of these companies are good investments in the long term. Some of them may bounce more in the short term. TCK has a Beta of 3.88. If the overall market bounces on good news from the EU, TCK may bounce faster and farther than other mining stocks. The analysts’ percentage one year gain of 130% for TCK is further evidence that it should bounce upward. The high Beta also helps to explain why TCK may have fallen so dramatically. CLF is another big bounce target with a predicted percentage one year gain of 120% and a Beta of 2.52. BTU is the leader in the coal space. Still I don’t think you can go too far wrong with any of these stocks.

Good Luck Trading.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in BTU, TCK, RIO, CLF over the next 72 hours.