Over the past 12 months the coal industry has fallen by about 58% on average. The factors responsible for this include not only climate change and environmental regulations, but more importantly the cheap natural gas that has gobbled up coal’s market share for electricity generation. For a value investor it is extremely important to find the right entry point in battered down industries. While the opportunity seems ripe, it is also critical to pick the stocks that have the greatest chance of a quick recovery and for this we use the hedge fund sentiment surrounding the company as a criterion. Following is the list of five coal miners that smart money is betting on.
Most investors don’t understand hedge funds and indicators that are based on hedge funds’ activities. They ignore hedge funds because of their recent poor performance in the bull market. Our research indicates that hedge funds underperformed because they aren’t 100% long. Hedge fund fees are also very large compared to the returns generated and they reduce the net returns experienced by investors. We uncovered that hedge funds’ long positions actually outperformed the market. For instance the 15 most popular small-cap stocks among funds beat the S&P 500 Index by more than 53 percentage points since the end of August 2012. These stocks returned a cumulative of 102% vs. a 49% gain for the S&P 500 Index (read the details). That’s why we believe investors should pay attention to what hedge funds are buying (rather than what their net returns are).
#5 Arch Coal Inc (NYSE:ACI)
Investors with Long Positions (as of September 30): 9
Aggregate Value of Investors’ Holdings (as of September 30): $8.02 Million
During the third quarter, the number of funds backing Arch Coal Inc (NYSE:ACI) fell by 6. However, the subsequent aggregate value of their holdings appreciated by about 33%, even though the stock price cratered by nearly 90% during this period. A large part of the slide came at the end of July when rival Alpha Natural Resources (NYSE:ANR) filed for bankruptcy. Plunging coal prices and increased regulations have seriously dented the company’s profitability. Jim Simons‘ Renaissance Technologies is the largest stockholder of Arch Coal Inc (NYSE:ACI) within our database as it owns 935,800 shares of the company.
#4 Cloud Peak Energy Inc. (NYSE:CLD)
Investors with Long Positions (as of September 30): 15
Aggregate Value of Investors’ Holdings (as of September 30): $15.31 Million
Owing to soft demand for coal, particularly from China, Cloud Peak Energy Inc. (NYSE:CLD) recently announced that it has ammended its agreement with BNSF Railway, which will now disregard the previous volume obligation arrangement. While the number of hedge funds with investment in Cloud Peak Energy Inc. (NYSE:CLD) remained unchanged during the third quarter, the aggregate value of these holdings slightly decreased by 2.5%. David Iben‘s Kopernik Global Investors holds about 3.45 million shares of Cloud Peak Energy Inc. (NYSE:CLD) valued at $9.08 million as of the end of September.