I am trying to hand you a gift here, so that you make enough money so that EVERY reader can invest in my mutual fund when we launch in 2009 (right?) - remember, coal is going to be next year's fertilizer... with CNBC anchors aghast at coal and wondering "where did this all come action come from, I thought the bubble ended last year with that stupid potash!". I'm telling you now, a year ahead of time. I'm using Alpha Natural Resources (ANR) and Massey Energy (MEE) more specific for the metallurgical coal but any coal name has some exposure. [Apr 8: Changing Coal Allocation - Peabody Energy Out - Alpha Natural Resources In] I did a full analysis in that entry comparing the 2 names and potential profits/upside.
And....
Missed fertilizer? Get coal. So you can tell your friends next year you were there first. Come back in 1 year, book some profits, send check to my fund and we are all happy. In the meantime, you can sort of laugh quietly to self when CNBC tells you it's time to get out because the dollar will be going up 7% vs the Euro in the next 2 months.
Rarely do I pound the table or use that sort of language (above) but this was just a totally missed opportunity by the Street.... further, in this piece [May 5: Alpha Natural Resources Booming Earnings - Just the Start] I wrote
As I keep saying, metallurgical coal is about where fertilizer was 15 months ago - we have a long wave of earnings estimates upwards coming in the year+ ahead, with the biggest pushes up in earnings coming in about a year. Alpha Natural Resources (ANR) is up about 7% premarket as I check off a fabulous earnings report.... just getting started in a long and winding road up over the next year I believe.
I wrote a piece on fertilizer in October 2007 about just how wrong these analysts (who are supposed to be industry experts and just follow one sector) were... when a no name like me could see the coming earnings explosion [Oct 23: Analysts Still Doubting the Fertilizer Stocks] - since then estimates for many of these companies have gone up 2-3x in the out years. Replace the word fertilizer with metallurgical coal and check back in 15 months; once again analysts are so... so... so... wrong. And this creates opportunities for us, before CNBC jumps on the bandwagon next Valentine's Day proclaiming the bubble that is coal.
So the "wisdom" spouted from every corner at the time was buy retailers, financials as this is the early cycle bottom and the strong dollar will hurt commodities... I was saying there was no strong dollar - we are in major danger here and no one wants our dollar. But the hedge fund computers were buying that junk for about 7-10 days before selling it all off to suckers who listened to the conventional wisdom.
As for the thesis that coal was the next fertilizer - well it was a major hit - but it appears it has come to fruition much earlier than I anticipated. But anyone doing their homework ahead of time could see that large moves were coming - while I wrote those 2 entries in May - in April I was commenting about the huge contracts being signed/discussed [April 8: Posco Agrees to 200% Coal Price Increase] and [April 8: ArcelorMittal Sees Metallurgical Coal Prices Rising 150-200%] And this folks, is how by doing homework, you can (a) get in ahead of the crowd and (b) have conviction to hold / buy more - when the stocks are selling off and the talking heads are promising you the commodity play is over due to the "strong dollar". (people always email me asking "where" I get my ideas - here is a case example - just read, investigate, read, read, read, think, and read more. Then proceed to ignore almost everything coming from "pundits" aka used car salesmen with nicer ties, and top 20 business school degrees ;))
With that said, while I was expecting big moves in the coming year, I did not think it would come in such a compressed manner. These moves are breathtaking - these are 1 month charts of the 3 main names in the metallurgical coal area that I follow; the gains are from the beginning of May when I wrote these 2 pieces
Alpha Natural Resources (ANR) +50% in 3 weeks
Massey Energy (MEE) +40% in 3 weeks
Walter Industries (WLT) +40% in 3 weeks
Now, I've been cutting layers out of the 2 positions I've held, Massey Energy and Alpha Natural Resources along the way, and we are (much like everything in the sector) approaching parabolic status. But just remember the conversation 3 weeks ago when everyone was saying, the run is over because the dollar is strengthening. The next time the Federal Reserve meets the same "run" will happen because "they" will say the Federal Reserve is fighting inflation. How? By putting "strong language" into their statement. I don't know about you, but I have never seen "words" bring down the prices of groceries or fuel. Only in Wall Street logic does it work. And when that happens, commodities go down - and banks, retailers, and assorted junk goes up. On the hedge fund computers saying "this is what must happen". Until it reverses a week or two later.
The perfect storm is developing for US coal, especially metallurgical - until/unless China stops buying steel as if it is nobody's business. Just today steel giant Mittal (MT) bought a 14.9% stake in another metallurgical coal producer overseas - with the prices for iron ore and metallurgical coal going through the roof, it behooves the steel companies to secure their own supplies. So on top of ALL the other positives in this group, we now have potential takeover bids coming in the next year.
- ArcelorMittal, the world's biggest steelmaker, may offer at least A$4.2 billion ($4 billion) for Australia's Macarthur Coal Ltd. to secure supplies as prices for raw materials surge.
- ArcelorMittal may acquire Brisbane-based Macarthur, the world's biggest maker of pulverized coal used by steelmakers, to increase its self-sufficiency in coal beyond 15 percent after prices of the steelmaking raw material tripled this year.
- ``I would assume they will go for full control,'' Andrew Keen, an analyst at Sanford C. Bernstein in London who has an ``outperform'' recommendation on ArcelorMittal, said today by phone. ``This could become a hotly contested situation because a lot of people have very deep pockets at the moment.''
- Buying Macarthur would take ArcelorMittal's coal self sufficiency to about 20 percent, compared with the 45 percent coverage it has in iron ore, another key raw material, Bernstein's Keen said.
Our "World of Shortages" theme continues to deliver big benefits for the fund. [Dec 6: Coal Stocks Quietly in a Bull Market] When the rest of the herd gets on the coal train over the coming year, we'll already have been sitting in it since September 2007. With that said, this group is due for a correction....
Long Massey Energy, Alpha Natural Resources in fund; long Alpha Natural Resources in personal account
