Coal Stocks – Finally Time to Buy?

• Posted by Robert Sinn
• on June 13th, 2012

Any market participant who lived through 2008 will always vividly remember just how behind the curve the sell-side analysts were on the financials. As financials turned lower beginning in October 2007 the majority of analysts maintained lofty price targets and continued to advise “buying weakness” as they cited “normalized earnings”, “attractive price/book values”, and “record historically cheap P/E ratios” to support their buy recommendations.

As we now know the analysts were badly behind the curve as a result of their failure to grasp the magnitude of the tectonic movements underneath the US financial system which resulted from the bursting of the housing bubble. Traditional valuation metrics such as price/book value, price/earnings, normalized earnings etc. were irrelevant due to the rapidly changing market environment and business models of US financial institutions. Securitization was dead, housing prices were in free-fall, massive regulation was coming down the pipe, and perhaps most importantly these institutions would be forced to deleverage and raise capital into a falling market.

The analysts continued to look into the rear-view mirror  instead of attempting to grasp the rapid and unprecedented changes that were taking place throughout our financial system. Moreover, they displayed a stunning arrogance as they repeatedly advised “buying the dips” and proclaimed that “the selling was overdone” and that “this is the buying opportunity of a lifetime”. Perhaps one of the best examples of this behind the curve arrogance was Cititgroup ($C):

Throughout the entire massive dowtrend from late-2007 until early 2009 investors heard a lot about how cheap Citi was on a price/book value basis or about how Citi presented a “generational buying opportunity” while the stock continued lower. In fact, it wasn’t until the bottom in early 2009 that the majority of sell-side analysts finally “capitulated” by drastically reducing their price targets and earnings estimates for the financial sector.

The recent bottomless decline in coal stocks is eerily reminiscent of the 2007-2009 plunge in financial stocks – the analysts have been well behind the curve, maintaining lofty price targets as the outlook for the sector and individual names has continued to deteriorate primarily due to the China slowdown. On May 22nd I pointed out “The Coal Debacle” and highlighted just how badly behind the curve the analysts have been on this sector. Three weeks later there are some signs that a bottom may finally be approaching for some of these names as the analyst community has become more realistic on the sector’s outlook and some have even begun to “throw in the towel” on the sector after chasing the stocks lower for the last year – $ANR and $PCX are just two examples:

After maintaining price targets between 20-50% above the market price during ANR’s entire decline from its 2011 peak above $60/share, Credit Suisse ($CS) cut ANR to an $11 price target last week and increased their 2013 loss estimate to .66/share. Meanwhile, the $PCX analysts have been laughably awful:

 

While many coal names such as ANR and PCX still face serious challenges going forward as they deal with heavy debt burdens, reduced production, and falling coal prices – it is clear that market expectations are finally low enough for a sustainable bottom to be put in place if the industry outlook were to even brighten ever so slightly.

 

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

blog comments powered by Disqus