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Billionaire Steve Cohen Buying More Coal at Walter Energy

According to a 13G filed with the SEC, billionaire Steve Cohen’s SAC Capital Advisors recently owned 3.3 million shares of Walter Energy, Inc. (NYSE:WLT), a $1.8 billion market cap coal miner. We track 13F filings from hedge funds as part of our work researching investment strategies (we have found, for example, that the most popular small cap stocks among hedge funds generate an average excess return of 18 percentage points per year). We can also see from this database that SAC had reported a position of 1.7 million shares at the end of December (see more stocks Cohen reported owning), so the fund has roughly doubled the size of its position so far this year.

Walter is a leading metallurgical producer, and also mines thermal coal and other minerals. The company reported 7 million metric tons of met coal and 3.1 million metric tons of thermal coal. Metallurgical coal is a crucial input in steel production, where demand has been low in the last couple years due to macro factors (Walter’s beta is 2.1, demonstrating the company’s general sensitivity to economic conditions). Thermal coal- also known as steam coal- is purchased by electric utilities for power generation purposes, and has also been a struggling industry (at least in the U.S.) due to the abundance of cheap natural gas. Walter’s revenue declined 7% last year in comparison to the recast 2011 numbers, and operating income (after adding back a large goodwill impairment and other special items) came in at only about $100 million, down from about $570 million. The company also recorded over $100 million in net interest expense, making Walter unprofitable for 2012 even after the addbacks. The stock price has fallen 54% in the last year.

Steven CohenMetallurgical coal does have the prospect to recover if steel demand picks up, though Wall Street analysts are not expecting business to improve much this year: expectations are for losses of 76 cents per share in 2013. After that point the sell-side does expect profitability and so the forward P/E- based on consensus estimates for 2014- is 13. Dmitry Balyasny’s Balyasny Asset Management had increased its stake in Walter Energy by 53% in the fourth quarter of 2012, closing December with almost 3 million shares in its portfolio (find Balyasny’s favorite stocks). Renaissance Technologies, founded by billionaire Jim Simons, disclosed ownership of 1.4 million shares (check out Renaissance’s stock picks).