Interactive Investor

Chart of the week: energy crisis triggers interest in this sin stock

3rd October 2022 12:51

John Burford from interactive investor

It won’t be everyone’s cup of tea, but prices for this company's product have surged, and there could be more to come. Analyst John Burford explains why the share price could rally too. 

Peabody Energy – will coal become king again?

Regular readers know that I love to challenge the consensus, so it is that I tackle a stock strongly associated with the 'climate emergency'.

Why have I chosen this difficult path to challenge authority? Is it just my sense of mischief going nuclear? Partly, but history tells us that – in the immortal words of a famous old-time trader – when everybody believes something is certain to happen, something else does. And that is when profits beckon.

We see this all the time in markets. Very few alerted the world to the high probability that the 5 January top tick in the Dow jones index at 36,900 would be its all-time high print. It seemed to most that the good times of low interest rates, Fed support and growing earnings as economies were emerging quickly from the pandemic would keep rolling on.

But with bullish sentiment sky-high, experienced traders knew that the end was nigh in all probability. The signs were there. NFTs (non fungible tokens) were shooting for the moon and even the notoriously staid Bank of England was getting involved in them. To me, that was a clear sign of a mania top (they have since crashed).

And today we are in a very different world from that of nine months ago.

Yes, the net zero campaign by most Western governments is producing its own very contrary results from that intended. Waging total war on fossil fuels has powered massive bull markets in crude oil, natural gas and its derivatives – and the so-called 'dirtiest' fuel of all – coal.

Investments in coal have become completely off-limits for many investors, especially for ESG investors, but the energy crisis currently gripping Europe is causing a change of strategy by some governments on the Continent. In fact, the jump in thermal coal prices for power generation had begun months before, when an energy shortage first became apparent.

And an honest glance at the stock price charts reveals that coal has been a very solid investment. The purest coal play is the US-based Peabody Energy Corp (NYSE:BTU) (incidentally, it recently changed its name from Peabody Coal I believe to draw attention way from its roots).

Past performance is not a guide to future performance.

Peabody made its low at $7 during and after the Corona Crash following years of funds divesting its shares on pure ideological grounds. They were certainly a great short in this period!

But since the low, it was clear the days of coal were not numbered after all and, in fact, the forced under-investment in the sector is producing a stunning bull market (similar to that in crude oil). 

Coal prices today are reaching historic highs, and global coal consumption likewise is at historic highs – and climbing. Many independent energy experts are forecasting this to continue into 2023 – and beyond.

And Peabody is certainly taking full advantage. It is curious that very few analysts are covering this stock and it is difficult to find decent data. It seems to be a pariah in the financial world. But one such data point has the current price/earnings (PE) ratio at under 5. For what that is worth, it’s similar to Glencore.

The shares are at the $24 region and should continue much higher. A decline to under $20 would send me back to the drawing board. Note that shares priced in dollars would benefit UK investors if the dollar continues its upward path.

Finally, is it possible with the rapidly diminishing list of positive share investments, investors will find a way to invest in coal again which has such encouraging potential? 

Much stranger things have happened and we are in a brave new world of finance where many things are being turned on their heads.

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