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As Coal Industry Shows Signs of Recovery, Here Are Hedge Funds’ Favorite Coal Miners

The coal industry has been plagued by a large number of bankruptcies over the past two years, as reduced demand and oversupply provided a brutal test of survival for coal miners. But just as investors were starting to wonder if the industry is ever going to recover, coal miners registered a noticeable improvement in their financial performance in the second quarter. In this article we’ll take a look at the coal mining companies smart money like best.

Hedge fund sentiment is an important metric for assessing long-term profitability. At Insider Monkey, we track over 740 hedge funds, whose quarterly 13F filings we analyze to determine their collective sentiment towards several thousand stocks. However, our research has shown that the best strategy is to follow hedge funds into their small-cap picks. This approach can allow monthly returns of nearly 95 basis points above the market, as we determined through extensive backtests covering the period between 1999 and 2012 (read more details here).

Mining Tunnel Coal

#5 Alliance Holdings GP, L.P. (NASDAQ:AHGP)

-Number of Hedge Fund Holders (as of June 30): 7

-Concentration (as of June 30): 1.5%

The hedge fund sentiment towards Alliance Holdings remained unchanged during the second quarter, with the same number of long positions at the end of June as a quarter before. Adam Peterson‘s Magnolia Capital Fund held the largest stake among the funds we follow, having reported ownership of 330,449 shares, down by 47% over the quarter. Alliance Holdings GP, L.P. (NASDAQ:AHGP) operates in the Illinois Basin coal region and mines thermal coal, which is used in electric power plants. Unlike most of its competitors, the company managed to stay profitable during the coal downturn. In the first half of 2016, the company registered a net income of $1.27 per unit, while its long-term debt is just 20% of capital structure. Alliance Holdings GP, L.P. (NASDAQ:AHGP) also pays an annual dividend of $2.20 per share, providing investors with a 8.51% yield.

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#4 Cloud Peak Energy Inc. (NYSE:CLD)

Number of Hedge Fund Holders (as of June 30): 8

-Concentration (as of June 30): 14%

The popularity of Cloud Peak Energy cooled down a bit during the last quarter, as the number of funds invested in the company dropped to eight at the end of June from 10 three months earlier. Billionaire Andreas Halvorsen made a big bullish play on Cloud Peak Energy Inc. (NYSE:CLD), with his fund, Viking Global, having acquired 2.93 million shares during the quarter, a position valued at $6.03 million. After establishing an all-time low of $1.08 per share in January, the stock staged a remarkable rally, having advanced by 93% year-to-date. At the end of July, Cloud Peak Energy Inc. (NYSE:CLD) reported second-quarter financial results, posting a net income of $35.3 million, up from a loss of $52.9 million a year before. “Our financial performance during the quarter benefited from buyouts by three customers and the impact of reduced reclamation cost assumptions on our asset retirement obligations. Once again our sites did a very good job of controlling costs during the quarter as we reacted to very low shipments,” commented Colin Marshall, President and Chief Executive Officer of Cloud Peak Energy.

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#3 Westmoreland Coal Company (NASDAQ:WLB)

-Number of Hedge Fund Holders (as of June 30): 12

-Concentration (as of June 30): 32%

At the end of June, 12 of the funds followed by Insider Monkey had Westmoreland Coal Company in their equity portfolios, down from 14 a quarter earlier. Jeffrey Gendell’s Tontine Asset Management increased its holding in Westmoreland Coal Company (NASDAQ:WLB) by 2% to 1.19 million shares worth approximately $11.3 million at the end of the quarter. The company has a market cap of $166.5 million and does not pay a dividend. Aside from mining coal, Westmoreland Coal operates two coal-fired power generating units that have capacity of 230 megawatts. For the second quarter, Westmoreland Coal Company (NASDAQ:WLB) posted $356.2 million in revenues and a loss of $1.37 per per share. “We remain on track to meet our 2016 adjusted EBITDA and free cash flow guidance based on our first half results and the demand trends that have continued to strengthen since June,” said Chief Executive Officer Kevin Paprzycki. The company has reiterated its full-year guidance of 53 million to 60 million tons of coal sold and Adjusted EBITDA of $235 million to $275 million.

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#2 BHP Billiton plc (ADR) (NYSE:BBL)

-Number of Hedge Fund Holders (as of June 30): 19

-Concentration (as of June 30): 0.5%

The largest mining company in the world is sitting pretty on the second place, with 19 of the funds in our database having reported a stake as of the end of the quarter, up from 15 three months earlier. In its latest 13F filing, Jim Simons‘ Renaissance Technologies reported a fresh stake in BHP Billiton plc (ADR) (NYSE:BBL), having amassed 593,700 shares valued at $15.1 million. The British mining giant has a market cap of $71.5 billion and pays an annual dividend of $0.60 per share, providing shareholders with a 2.19% yield. Analysts have assigned a forward Price-to-Earnings (P/E) ratio of 15, which signals belief that the company is going to improve its earnings in the near future. Jefferies Group has recently upgraded the stock to ‘Buy’ from ‘Hold’ and has raised its price target to $33 per share from $28, while analysts at Deutsche Bank have played it safe and reiterated their ‘Hold’ rating.

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#1 CONSOL Energy Inc. (NYSE:CNX)

-Number of Hedge Fund Holders (as of June 30): 34

-Concentration (as of June 30): 40%

The number one coal company in this top, CONSOL Energy could be found in the equity portfolios of 34 of the funds we follow, up from 33 registered a quarter before. David Einhorn‘s Greenlight Capital had its stake cut by 26% during the quarter, reporting ownership of 22 million shares worth $354 million at the end of June. CONSOL Energy Inc. (NYSE:CNX) has been a great performer so far this year, having surged by 138% to Wednesday’s closing price of $18.62 per share. The company has a market cap of $4.32 billion and does not pay a dividend. CONSOL Energy Inc. (NYSE:CNX) has recently dumped some of its debt-ridden assets, paying $44 million to Southeastern Land to take over the remaining coal mining assets from West Virginia which carry $103 million in liabilities. “The Miller Creek Complex is a premier asset in Central Appalachia, but no longer fits our portfolio. These transactions constitute an important step in continuing to strengthen CEI’s balance sheet, enhancing liquidity, reducing our operational and regulatory risk profile and assisting with CEI’s transition to a pure play E&P business,” read a regulatory filing submitted by CONSOL Energy.

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Disclosure: none

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