Market Overview

A Coal Stock Pair Trade for Monday

BMO Capital Markets analyst Meredith Bandy released a series of reports Monday morning that weighed in on energy equities, specifically those in the coal sector. Two of the ratings were upgrades while two were downgrades, setting a few possible pair trades.

First on the list was Peabody Energy (NYSE: BTU), which was downgraded to Market Perform.

The report cited near-term headwinds coming from its high financial leverage and falling margins. Historically, Peabody has traded higher than the rest of the coal group based on its asset value and geographic diversification. Bandy also added that a strong management team has pitched in as well.

Bandy also cited an expected rise in met coal pricing for the long term, so further down the road it would seem the bullish case for Peabody rebuilds itself quickly

Second on the ratings list was Cloud Peak Energy (NYSE: CLD), which was upgraded to Outperform.

The upgrade was based on the company having low enough costs on its coal production to be able to compete with natural gas while having a strong balance sheet that undervalues many of its assets. With a $22 price target, Bandy saw roughly a 21 percent upside from Friday's close.

Third in the series was CONSOL Energy (NYSE: CNX), which was upgraded to an Outperform rating.

The report stated that CONSOL was expected to be one of the few to not break pricing covenants. While its valuation looks attractive for the industry, this gives less conviction than the other upgrade on the list.

The fourth rating was Walter Energy (NYSE: WLT), which was downgraded to a Market Perform rating, again citing near term headwinds from high leverage and falling margins.

The rationale for the downgrade almost identically reflected that of Peabody Energy, so in the case of a pair trade, it would seem BMO believed the two could be interchangeable on the bear side.

Optimally, an equally weighted pair trade placed in the pre-market Monday morning would have netted a little over 1.2 percent had Peabody been picked on the downside and CONSOL on the up.

So far, Peabody has fallen 1.86 percent this morning, while Walter has dropped past it, falling 3.47 percent. On the upside CONSOL has gained just under 0.60 percent while Cloud Peak is actually down just under 0.60 percent.

Posted-In: BMO Capital Markets Meredith BandyLong Ideas Short Ideas Upgrades Downgrades Commodities Markets Analyst Ratings Trading Ideas Best of Benzinga

 

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