In a weak market, the coal stocks really took it on the chin in yesterday's trading with companies including Alpha Natural Resources (ticker ANR) and Arch Coal (ticker ACI) - both owned in portfolios I manage- down by double digit rates. Many news services were out with stories attributing the decline to Obama's reelection. Although I do believe the election results did provide a catalyst for some investors to take profits, I think there are more facets to the decline than just the election. In addition, I am not overly concerned, just yet, that the reelection is a harbinger of another down leg in the group. Here is why.
One item I think that has been overlooked by the media was that James River Coal (ticker JRCC) reported third quarter results that missed estimates. The stocks sold off hard on the news, I think in part due to the results tempering the expectations for a fast turnaround. Investors and traders should also realize that JRCC, at least in my opinion, is an also-ran in the coal industry. The company is far from being a best of breed, and has faced operating issues even when times were fantastic.
JRCC had previously hit the new high volume high screens, which I had highlighted. Yesterday's selloff does negate that positive occurrence and suggests that the stock is likely to pull into the $2.70 to $3 range. (Note- I was considering using JRCC as a short in the short trading portfolio. However, the rules on Marketocracy prevent users from shorting stocks with prices below $5.) JRCC's results likely had a knock on affect on the industry.
Although JRCC was weak, the price/volume dynamics for rest of the group were no where near as negative. The following are charts for some of the companies in the industry.
I am not going to go over each chart above. However, the central theme I see in most of stocks- aside from Walter Energy's stock, which is completely exposed to metallurgical coal and met coal is further from a recovery than thermal coal- is that yesterday's price/volume dynamics does not suggest a protracted decline from current price levels. The stocks pulled back on increased volume, but the volume levels were generally below the uptrend price levels. To me, this suggests a continued consolidation within the sideways trend.
Yes, percentage decreases were large, but investors and traders should remember two points. Coal stocks are low priced stocks, which has the affect of leveraging upside and downside moves. In addition, my research has shown that coal stocks are extremely high beta stocks and 5% to 15% moves are not of the ordinary. This is even when times were good. The high beta nature of the group played into yeterday's decline, as the overall market weakness pulled down the coal industry by a disproportionate amount.
The decline yesterday was concerning, but I am not ready to pull the trigger and say the group is done just yet. I continue to believe that the thermal coal market is gradually improving and that the coal industry will benefit from this recovery.
One item I think that has been overlooked by the media was that James River Coal (ticker JRCC) reported third quarter results that missed estimates. The stocks sold off hard on the news, I think in part due to the results tempering the expectations for a fast turnaround. Investors and traders should also realize that JRCC, at least in my opinion, is an also-ran in the coal industry. The company is far from being a best of breed, and has faced operating issues even when times were fantastic.
JRCC had previously hit the new high volume high screens, which I had highlighted. Yesterday's selloff does negate that positive occurrence and suggests that the stock is likely to pull into the $2.70 to $3 range. (Note- I was considering using JRCC as a short in the short trading portfolio. However, the rules on Marketocracy prevent users from shorting stocks with prices below $5.) JRCC's results likely had a knock on affect on the industry.
Although JRCC was weak, the price/volume dynamics for rest of the group were no where near as negative. The following are charts for some of the companies in the industry.
I am not going to go over each chart above. However, the central theme I see in most of stocks- aside from Walter Energy's stock, which is completely exposed to metallurgical coal and met coal is further from a recovery than thermal coal- is that yesterday's price/volume dynamics does not suggest a protracted decline from current price levels. The stocks pulled back on increased volume, but the volume levels were generally below the uptrend price levels. To me, this suggests a continued consolidation within the sideways trend.
Yes, percentage decreases were large, but investors and traders should remember two points. Coal stocks are low priced stocks, which has the affect of leveraging upside and downside moves. In addition, my research has shown that coal stocks are extremely high beta stocks and 5% to 15% moves are not of the ordinary. This is even when times were good. The high beta nature of the group played into yeterday's decline, as the overall market weakness pulled down the coal industry by a disproportionate amount.
The decline yesterday was concerning, but I am not ready to pull the trigger and say the group is done just yet. I continue to believe that the thermal coal market is gradually improving and that the coal industry will benefit from this recovery.
No comments:
Post a Comment