Market Overview

Arch Coal, Peabody Energy See Sharp Rises in Short Interest

Arch Coal, Peabody Energy See Sharp Rises in Short Interest

The short interest in many coal-related stocks increased between the March 28 and April 15 settlement dates.

The number of shares sold short in Alliance Holdings (NASDAQ: AHGP), Alliance Resource Partners (NASDAQ: ARLP), Alpha Natural Resources (NYSE: ANR), Arch Coal (NYSE: ACI), Cloud Peak Energy (NYSE: CLD), James River Coal (NASDAQ: JRCC), Peabody Energy (NYSE: BTU), Walter Energy (NYSE: WLT), Westmoreland Coal (NASDAQ: WLB) and Yanzhou Coal Mining (NYSE: YZC) swelled in the period.

However, short interest in CONSOL Energy (NYSE: CNX), Natural Resource Partners (NYSE: NRP), Rhino Resource Partners (NYSE: RNO) and SunCoke Energy (NYSE: SXC) declined during that time.

The three coal stocks that saw the largest upswings in short interest in the initial two weeks of April were Alliance Resource Partners, Arch Coal and Peabody Energy.

Alliance Resource Partners

Shares sold short in this producer of coal for utilities and industrial users surged more than 56 percent to more than 418,000. That was the fourth consecutive period of rising short interest. Days to cover rose to more than six. The short interest was about two percent of the float.

This Tulsa, Oklahoma-based mining company has a market capitalization of about $2.5 billion and a dividend (distribution) yield near 6.7 percent. It reported record coal production and earnings in the first quarter. The return on equity is more than 24 percent and the operating margin is greater than the industry average.

Nine analysts who follow the stock were surveyed by Thomson/First Call. Seven recommend buying shares and two recommended holding them. But the analysts feel the stock has plenty of headroom as their mean price target indicates upside potential of about 11 percent. That target would be a new 52-week high.

The share price is up more than 13 percent year-to-date and reached a new 52-week high on Friday. Over the past six months, the stock has outperformed competitors Arch Coal and Peabody Energy, but it has underperformed the Dow Jones Industrial Average.

Arch Coal

Short interest in this St. Louis-based company increased more than 14 percent in the period to 34.13 million shares. That was the second greatest number of shares sold short so far this year, and it represents more than 16 percent of the company's float. Days to cover fell to less than three.

The second-largest U.S. coal producer posted a net loss for the first-quarter but forecast a stronger second half. The company has a market cap near $1 billion and a dividend yield of about 2.5 percent. The long-term earnings per share (EPS) growth forecast is about five percent, and the return on equity is in negative territory.

The consensus recommendation of the surveyed analysts is to hold the shares, and it has been for at least three months. Their mean price target is more than 32 percent higher than the current share price. But note that target is well below the 52-week high hit nearly a year ago.

The share price dropped to a multiyear low ahead of the recent earnings release, and it now is down almost 32 percent year-to-date. The stock has underperformed competitors such as Alpha Natural Resources and CONSOL Energy, as well as the Dow Jones Industrial Average, over the past six months.

Peabody Energy

This St. Louis-based miner saw short interest rise almost 13 percent in early April to about 11.79 million shares. That was more than four percent of the float and the second largest number of shares sold short since the beginning of the year. Days to cover was less than two.

Peabody Energy faces a lawsuit over its 2007 spinoff of Patriot Coal, which filed for bankruptcy in July. Peabody Energy currently has a market cap of more than $5 billion and offers a dividend yield of about 1.8 percent. Note that its operating margin and its return on equity are both in the red.

Yet 17 of the 25 analysts polled recommend buying shares, seven of them rating the stock at Strong Buy. The analysts' mean price target suggests more than 35 percent potential upside relative to the current share price. That target is less than the 52-week high, though.

The stock fell to a multiyear low early last week, and the share price is still down almost 26 percent since the beginning of the year. Peabody Energy has underperformed competitor CONSOL Energy and the broader markets over the past six months.


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