Investing Wisely -- 5 Timely Valuations in - Coal Production

By: Steve Bauer | Fri, Nov 12, 2010
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Brief Introduction:

My focus is "Investing Wisely," e.g. taking advantage of the bull/bear cycles as they occur within the overall marketplace. Integrating modern analytics within these "cycles," means maintaining a process of the thorough fundamental and technical analysis of many companies and more than 200 industry groups in my universe.

Within these industry groups I frequently single out a few that appear to have either bullish or bearish profit potential. I believe that this discipline provides the necessary clarity regarding the cycles and the rotation that almost all companies and industry groups goes through - from favorable times to unfavorable times and perhaps back again.

I believe that this discipline provides the necessary clarity regarding the rotation that most all sectors, industry groups and companies goes through - from fundamentally favorable times to unfavorable times and perhaps back again.


"The market is doing what it loves to do." Lately, that means it is both fundamentally and technically very fickle. What the investor often forgets is that what appears to be a fact is, in reality - very creative fiction. The flow of fictional stories being told by Wall Street and the media are so compelling that the average Investor takes the hook, every time. That's a fact and, for me, it is very sad.

The current position of the Coal Production industry group both US domestic and international is quite high on my consensus rankings of over 200 industry groups. Therefore, I expect it (Coal) to begin to hold up well during the time frame of my anticipated pullback. Over the short-term, this industry group does definitely, qualify as "currently favorable" and the shares of its component companies should likely be considered during anticipated bullish moves in the marketplace. Over the longer-term I am quite positive. The oxymoron is - as always: Can you afford the risk/reward ratio and how is your insight to making timely investments? This industry group is definitely doing well in this current rally.

Since coming out of retirement in October 2007, I have witnessed a vast change in the "valuation" practices being offered by many financial analysts. The shenanigans and other "accounting practice games" were active before, but have now reached a new height of deception. The general public is often lazy about learning and perhaps naive. The financial analysts know that these characteristics exist and now are taking advantage. It's simple, the average Investor is asking to be told that - "all is ok" so that is what they are being given.


In the table below you will see why my approach of valuation offers five rather strong companies that I believe can profitable in the intermediate-term, however not necessarily now. Remember to be a bit patient before taking positions.


Fundamental Valuation / Comparative Analytics:

Table: Coal Production

Stock Cur. Price My Target Price
% Above (+) or
Below (-) Cur.
Price "Tweaked"
PEG P/E Forward P/E Average of Low/High Estimates Divergence (%) -then- "Tweaking" -to get- My Target Price % Multiplier Comments / My Analytics / Weighting: Fundamental (40%) Technical (35%) Consensus (25%) / When my anticipated pullback occurs - lower prices definitely forecasted for all?
Peabody
Energy (BTU)
59.7 + 25% - 75% 0.99 23.7 12.8 + 185% Obviously a very strong valuation and price projection.
Consolidated
Energy (CNX)
43.7 + 20% - 65% 0.57 22.1 13.5 + 164% Obviously a very strong valuation and price projection.
Alpha Natural
(ANR)
49.8 + 50% - 200+% 1.08 56.3 11.4 + 494% Obviously a very strong valuation and price projection.
Walter Energy
(WLT)
99.1 + 20% - 60% 3.81 15.7 9.1 + 172% PEG is too high for me. Avoid for the Near-Term.
Arch Coal
(ACI)
28.5 + 50% - 200+% 0.34 41.3 10.9 + 379% Obviously a very strong valuation and price projection.

Notes: Fundamental valuation, data in today's marketplace, requires that I look at the numbers as being either realistic or creative - which more recently is using "new / funny math." Because of the valuation data inconsistencies, I have adopted an additional procedure that I call "Tweaking the Results." This procedure is sometimes needed to get me back to "realistic valuations." It requires having an eye on the short and intermediate-term - company and industry group price movement, and is definitely not a part of my rather unique technical analysis. My valuations, also considers the two-year - forward P/E data. Using this procedure produces very accurate analytics for decisions at bullish and bearish inflection points.

Most financial analysts determine the price target range by estimating a - future earnings per share and then applying a price-to-earnings "multiple," also known as the P/E ratio. I prefer to calculate price targets (high/low) for both the current and next fiscal year by applying the stock's present multiple to the average analyst's estimates and follow with some foxy "tweaking" of the results.

Further I believe that there should be just two aspects of fundamental valuation. They are now and later, which translates to 1-2 years and more than three years. Obviously, the further out we try to project earnings and cash flow the more inaccurate the data becomes. That is why I do my valuations rather frequently.

PEGs: You will note that these companies are carrying low PEG ratios with the exception of Walter Energy. Normally, that is typical of Coal and does not mean much to my current valuations however I am quite favorable impressed.



Technical Thoughts / Analytics:

The General Market and many Companies are obviously on a tear but like all such things - that too will come to an end. So for the marketplace, the energy sector and this industry group it is too late to buy and too early to sell.

I remain 100% in cash and am waiting for a Bearish Inflection point to take new positions. That may occur in a couple of weeks or perhaps sooner. The internal topping action is continuing. However, this past week was on balance very positive. That's good if you are forecasting a near-term top. So for this old bearish fox (technically speaking) I'm pleased with the statistics, indicators and charts.

For a current (up to the minute) chart of the Oil & Gas - Exploration & Production and several other industry groups see and then scroll down:

http://stockcharts.com/def/servlet/Favorites.CServlet?obj=ID4095527

Should you be seeking near-term or perhaps longer-term market guidance / direction, please feel free to Email me, and I will respond promptly.



My Wrap:

So while the general market may be in for a pullback, the prevailing question from most investors is: How big will it be? Do I hold my current positions or do I sell? The answer will be obviously quite clear when it (the pullback) is over but an old axiom tells us to be prudent in times like this. You might want to remember that cash is always an excellent safe harbor. However, if you are a proactive investor, taking bearish positions may be also being wise.

I believe a correction is coming, and soon. When it does arrive, it will likely have a negative effect on most all industry groups and many other securities in the Energy sector. So, the second question is always WHEN - for both rallies and corrections? The answer to that question is one that we can be sure of: There will be future rallies and pullbacks as the marketplace cycles. You can easily confirm this by simple looking at historic long-term charts of the stock market itself or just about any company or ETF.

The point is that indices and securities all go through "cycles" in one manner or another. Typically, when over-extended prices occur, they turn down. The opposite is also normally true - when over-contracted prices occur, they turn up. The trick is to have a methodology in place that both take advantage of these facts and also offers a consistent and a high probability of profitable - future investment decisions.

It is important that this article be viewed not as a recommendation for the purchase or short sale of these or other Coal companies. Favorable to the process of "investing wisely", it is intended to suggest that its sector and sub industry groups has both positive and negative companies and ETFs (components) to consider when making investment decisions.

Industry Group analytics, is a very necessary process however, it is just an excellent "bellwether" to help identify candidates for buying and candidates for short selling as the marketplace cycles from bull to bear and back again over and over and over again. Thus, we are presented frequent and conservative opportunities to invest or to simple hold cash.

The good news about the current marketplace is - we are presented frequent and conservative / low risk opportunities to invest - Long, invest - Short or to simple to hold cash. For me this plus watching the Bottom Line is "Investing Wisely".

Source & Data Information: BarCharts, Bauer Capital Management, Bloomberg, CNN Money, Fortune, MSN Financial, RiskMetrics Group, SafeHaven, Seeking Alpha, StockCharts, Reuters, Yahoo Financial, Worden



My Current Bottom Line:

* I am holding 100% Cash.

* Patience and Discipline - waiting for my list of Fundamental, Consensus and Technical - "Conformations" to all fall into place is part of the necessary process for "Investing Wisely".

* Inflection Points historically have occurred historically about three - five times per annum. We have already had 5 clear and meaningful Inflection Points so far this year. Investing at or around the time of my Inflection Points has proven to be a profitable way to invest.

* In my late August posting, I said: "The Market is now (very possible) setting up for another meaningful but likely (short in duration) Rally!" It certainly did rally!

* Now it looks just the opposite. One of these days this choppy and bifurcated market (late April to date) will do something meaningful and the next possibility of that is a Pullback.

* High Volatility may not currently be showing up on VIX - lately, but it is clearly - alive and well.


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Thank you for your time in reading my "stuff" and continued interest in my work.

Smile, have Fun - "Investing Wisely",

 


 

Steve Bauer

Author: Steve Bauer

Steven H. Bauer, Ph.D.

Steve Bauer

Steve has several degrees, i.e. post graduate degrees and doctorate and a great deal of (too much) continued education. For seven years, he did a stent as a University Professor of Finance and Economics.

Dr. Bauer also writes for SeekingAlpha.com. His articles can be viewed at: http://seekingalpha.com/author/steven-bauer?source=search_general&s=steven-bauer

He owned a privately held asset management firm and managed individual investor and corporate accounts as a Registered Investment Advisor - for over 40 years.

Professionally he is a financial analyst and private asset manager / consultant / mentor.

Steve can be reached at senorstevedrmx@yahoo.com

Copyright © 2010-2013 Steven H. Bauer, Ph.D.

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