Buying Coal Stocks is Usually A Bad Idea… But Maybe Not at The Moment

One of the biggest ironies of trading is that at times, you take short-term positions that go completely against your long-term view of a particular company, industry or sector. I mean, just because you think a company probably has an excellent future, that doesn’t mean that the stock can’t get overbought and be worth shorting, and stocks with a negative outlook over years can still bounce quite hard if conditions are right.

An example of the first of those would be Tesla (TSLA). Anyone who has ever driven one can attest to the fact that they are great cars, and the company just seems to be on the right side of history. Add in the revenue growth rate and the recent shift to profitable operations and the future looks bright. Still, none of that meant that the stock wasn’t vulnerable to a sharp pullback after a jump of over 350% in four months, nor that a company that still makes very few cars should be worth more than GM and Ford combined.

At some point the valuation will correct, one way or another. Either the stock will drop, or profits will start to catch up. Meanwhile, however, the street is littered with the bodies of those who have bet on the first of those options. TSLA is just not a stock to which logic applies, making it quite possible that the correction over time comes from a big jump in profits, so I won’t be shorting it here.

TSLA was just an example, however, and the example for the opposite scenario, where a stock that looks in trouble in the long-term but is still clearly oversold in the short-term, does provide a trading opportunity…coal stocks.

I know, I know, coal is the 2 Ds, dirty and doomed. I have been saying just that for a long time to anyone that would listen and have pointed out that every rally in coal stocks was an opportunity to sell. Over the last few years, I have been vindicated with each new bankruptcy. The fact is though that those rallies have happened, and I have nothing against buying in anticipation one of them for the short term, even if it is just to reverse after a run up into an advantageous short position.

And, in the current market, a short-term rally, or at least period of overperformance, from coal stocks looks distinctly possible.

There are signs of a rotation amongst big investors from “growth” to “value”. The big tech stocks that are all about growth, the Apples, Netflix’s and Amazons of this world, are losing ground after a strong run up. AAPL, for example, has lost over 7% in just a couple of days, while AMZN and NFLX are 10% and 20% below their highs, respectively.

That is a move out of growth stocks, but with the Fed still handing out free money, the broader market has done very little. The S&P 500 is slightly up over that same period, indicating that there is still an appetite for stocks and for risk more generally, just not for big growth stocks.

That means there is a hunt for value going on, and value is a scarce commodity.

You may not believe in the long-term prospects of the coal industry, but you cannot say that in the short-term, stocks there don’t represent value.

Take, for example, Arch Resources, Inc. (ARCH).

The chart looks pretty much as you might expect for a coal company, but notice that on the way down, there have been a few significant short-term spikes. That is because every now and again, the obvious value in these stocks becomes a story, and we are headed that way now.

ARCH has a trailing P/E of 3.45, versus the average for the S&P 500 of 27.8. That is the kind of multiple you expect to see for a company that is approaching bankruptcy but that looks some way off for ARCH. They have a current ratio of well over 2, a book value around 50% higher than the current stock price and are profitable. They even have over $15 of cash per share on hand.

Yes, the long-term trend is away from their product, and a Biden Presidency next year, which is looking increasingly likely based on the current average of polls, won’t help either. For now, though, coal companies seem to have supply and demand in balance and can make money and that may be enough to create a short-term rally.

Please don’t get me wrong here. I am not saying that you should rush out and buy a bunch of coal stocks, then sit and wait. That will not end well. As strange as it feels to say it though, with appropriate stop losses and with a quick exit in mind, now might be a good time to consider coal.



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