While most financial markets were battered in the recent global selloff sparked by economic weakness in China, one company raised eyebrows for moving in the completely opposite direction.
From the middle of August until the last day of the month, BTU stock was one of very few assets that bucked the meltdown trend, as shares of Peabody Energy (BTU) skyrocketed over 141% while the Dow Jones Industrial Average lost 983 points, or 5.6%.
What made Peabody Energy an especially unlikely contrarian opportunity was its long-term performance in the markets. Since reaching a record closing price of $81.54 on June 30, 2008, BTU stock has lost a gut-wrenching, soul-crushing 98.3%.
The latest 11% selloff in BTU stock — catalyzed by a 15:1 reverse stock split viewed by the markets as a last-ditch Hail Mary — is merely a drop in the bucket. And BTU shares were trading hands at a respectable average price of $14.58 as recently as last year.
But the dramatic crisis in the energy and commodities sector has been horrifically brutal for the coal industry, one which Peabody Energy dominates as the biggest private-sector coal miner. Eventually, though, that distinction may be earned by default, not by merit.
Over the past few years, a litany of coal miners have declared bankruptcy, but even the most recent example of Alpha Natural Resources (ANRZQ) is shocking due to its former superiority within the industry. It’s hard to imagine that in early 2011, Alpha shares were trading above $60. Today, an equity stub costs less than a nickel.
Even if Peabody Energy were to avoid a fate befallen so many of its competitors, they are far from being out of the woods. Top-line sales continue to deteriorate, while profit margins are nonexistent as the commodities crisis worsens. On the balance sheet, BTU has endured significant cash flow problems, and the coal miner has run up some worryingly high debt relative to liquid assets and shareholders’ equity.
The thorn in Peabody’s side, however, is the price of coal, which prevents it — or anyone — from making a profit. At its zenith, a pound of Australian thermal coal fetched close to $200 in the summer of 2008. Seven years later, double-digit prices are the norm, with August averaging $62.18.
Moreover, the fluctuations of the coal market is in lockstep with BTU stock, sharing a very high statistical correlation of nearly 0.83 between January of 2008 and August of 2015.
Essentially, this means that any upside momentum in BTU stock going forward will likely be capped if there’s no corresponding strength in the coal market. Similarly, should coal stumble into another patch of volatility, we can reasonably expect BTU stock to quickly follow suit.
Peabody Energy’s enormous rally last month was a welcome change of pace for the coal mining industry. Unfortunately, it’s a classic case of too little, too late.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.