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Small Caps On The Move: Arch Coal (ACI)

|Includes: Arch Coal Inc (ARCH)

In this article, I'll be covering a small-cap stock that is moving on high volume… either up, or down. In addition, you'll learn why there's such a big move, and what recommendation I have.

Today's stock: Arch Coal (ACI)

Arch Coal is a top five U.S.-based global coal producer. Arch is also one of the most diversified American coal companies, with mining complexes across every major U.S. coal supply basin. ACI's core business is supplying cleaner-burning, low-sulfur thermal and metallurgical coal to power generators and steel manufacturers on five continents.

Arch Coal has been hit hard by low natural gas prices, posting some of the worst stock returns in the thermal coal industry. For reference, ACI shares were trading up near $35 in 2011

As you'll recall, cheaper natural gas is causing electric utilities to move from coal for electricity generation. The economics of natural gas make thermal coal less attractive.

On Friday last week, Arch Coal jumped over 10% on volume of nearly 31 million shares. In comparison, the 3 month moving average is just 13 million. That's more than double the normal volume of shares changing hands.

So why the surge in volume?

It's probably for a handful of reasons. First, last Friday was normal January options expiration as well as LEAP options expiry. That certainly can add to trading volume on the stock for hedging purposes.

In addition, natural gas prices appear to be back on the way up to test the $4 level. More expensive natural gas could keep utility providers burning coal a little longer, prompting some investors to buy the stock.

Finally, Arch will post earnings results in a couple of weeks on February 5th. Investors may be positioning in anticipation of better than expected earnings.

The verdict?

While shares of Arch look attractively priced when looking back to last year's trading range, I suggest you pass on the stock. Even though ACI shares sport an attractive price/book ratio of just 0.45x, the short-term earnings forecasts are bleak at best. For the fourth quarter of 2012, estimates are for a loss of $0.13 a share, with it falling further next quarter to a loss of $0.20 (consensus averages).

More importantly, the future of coal as the primary choice of utility providers is unclear. Certainly if natural gas prices rise well over $4, coal will remain in play. But odds are, with supply set to return to maximum levels over summer months, prices of natural gas should fall back toward the $3 level or lower… and coal will appear expensive on a relative basis.

Keeping you one step ahead,

A.J. Watkinson

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.