Insider Monkey has processed hundreds of 13F filings from hedge funds and other notable investors for the fourth quarter of 2012; these filings disclose many long equity positions, which the investor in question had in their portfolio at the end of December. By aggregating 13F filings, we can develop investment strategies including imitating hedge funds’ most popular stocks in various categories. The most popular small-cap stocks among hedge funds stand out in particular. These stocks outperformed the S&P 500 by 18 percentage points per year between 1999 and 2009, and since we started sharing these picks with the public, we’ve beaten the market by 18 percentage points in only 5 months (read the details of our market-beating strategy).
Another way to use this information is by pooling the filings and seeing which stocks in different industries were the most popular among the filers we track. Here are the top five stocks in the coal industry with the largest number of hedge fund bulls at the end of Q4.
The smart money’s top pick in this space was Peabody Energy Corporation (NYSE:BTU), with 32 hedge funds reporting a position in the company in Q4 of 2012. Peabody is a coal mining company with operations in the Western United States, the Midwest, and Australia, and it mines coal primarily for electricity-production purposes. The company also operates a coal trading and brokerage division that manages coal transactions.
According to our review of 13F filings, hedge funds reduced their total capital invested in Peabody last quarter by about 25%, but 32 funds were still long—two more than the next company on this list. Peabody did recently report better revenue, stating that 2012 revenues increased 2 percent to a record $8.08 billion over 2011, partly based on increased Australian coal revenues. However, the company reported a net loss of $1 billion, or a loss of $1.12 per diluted share, in Q4 of 2012. A portion of the loss was attributable to pre-tax impairment charges associated with mine closures in Australia and the United States. As a result, Peabody’s share price is down over 14% since the beginning of the year.
The second pick among hedge funds was Walter Energy, Inc. (NYSE:WLT). Walter Energy mainly produces metallurgical coal for the steel industry. The company recently reported revenues of $479 million for Q4 of 2012, down from $703 million in the prior year quarter, as well as a net loss of $71 million or $1.13 loss per diluted share for the quarter. Despite the disappointing earnings some hedge funds are still betting on a turnaround in coal prices. (See what large hedge fund initiated a position in Walter.)
Sitting at third on our list, Alpha Natural Resources, Inc. (NYSE:ANR) recently reported a 10% reduction in its workforce and a shift towards producing higher-priced metallurgical coal for the steel industry. The company has been hurt by the reduced demand for coal, reporting a Q4 loss of $127.6 million, or 58 cents a share. Alpha Natural Resources’ stock price has been volatile over the past year; it is currently trading at $8.56, which is down over 57% from its 52-week high, but well above its 52-week low of $5.28. Still, the company is attempting to adapt itself to the changing energy market brought about by low natural gas prices.
Who’s the best of the rest?
Arch Coal Inc (NYSE:ACI), meanwhile, is the next largest consensus hedge fund pick in this space, with 25 filers at the end of Q4. Unfortunately, the company has also been hurt by reduced demand for coal. Arch Coal reported a net loss of $295 million, or $1.39 per diluted share, for Q4 of 2012, with an annual adjusted net loss for 2012 of $77 million, or $0.36 per share. While the company’s share price is down around 24% YTD, the company did have its fair share of bulls heading into the beginning of the year; George Soros initiated a position, while Israel Englander of Millennium Management increased his stake by 279% in Q4 (see Englander’s full holdings here).
CONSOL Energy Inc. (NYSE:CNX), lastly, engages in the production of both coal and natural gas. The company reported that its Q4 2012 profit was down 23% based on the lower price of coal; it’s idling some its coal mining operations. On the flip side, Consol Energy’s stock has not been hurt as bad as the other companies discussed here; its share price is up slightly over 1% for the year, and it’s trading 23% above its 52-week low. Furthermore, hedge funds were increasing their overall investment in the company by about 3% last quarter. Steve Cohen of SAC Capital increased his position by nearly 50% over this same period.
Overall, coal companies are still facing strong macroeconomic headwinds. The increased availability of cheap natural gas has significantly reduced coal demand, combined with increased coal inventory. Despite these difficulties, we have noted that some well-known hedge fund managers are increasing their stakes in coal companies. Investors may wish to keep an eye on natural gas prices. If natural gas goes up, the demand for coal will likely increase, possibly sending the share prices of these companies higher. With results like these, it’s always important to consider the smart money’s sentiment.
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