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Investing in Coal Stocks

Written By Brian Hicks

Posted October 21, 2008

While once trusted Wall Street hotshots and politicians figure out how to calm the markets, experienced investors, like us, are turning back to value basics, and rebuilding portfolios with unfairly beaten, undervalued stocks.

Even Warren Buffett is a buyer.

"Be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread, gripping even seasoned investors," he says.

And that’s because he, like us, understands that sitting on the sidelines is no longer an option. 

You’re literally being offered the buying opportunity of a lifetime.

Sure, Wall Street spent 2007 and 2008 lying to you, bringing chaos to the global stage. But if you sit on the sidelines, waiting for things to improve, you’ll miss out.

Even billionaire Richard Rainwater understands that, buying up decimated oil stocks.

But there’s one beaten down sector that even the billionaires may not have noticed… yet.  And that’s investing in coal stocks—a beaten sector where fortunes are soon to be made.

Why Coal Stocks are a Buy

The last time we played coal stocks, SC Trading Pit readers walked with $2 to $3 gains on National Coal Corporation (NCOC).

This time, however, NCOC and its undervalued, beaten competitors are again buys after industry leader Peabody Energy crushed Q3 earnings by 59% – a year over year improvement of 1,078%, as EBITDA rose 190%. 

Better yet, Peabody’s President just said, "While there is uncertainty in today’s economy, any easing of demand growth is likely to be offset by diminished global coal supply. We believe that the long-term coal demand profile is very strong and will continue to be led by emerging economies."

Even coal maker Consol Energy expects demand for coal to remain strong.  "Supply is quite low compared to demand, so we should still see robust pricing."

Now, I ask you. Do numbers and a bright forecast like that warrant a 65% plunge in Peabody’s stock price since June 2008?

I think not.

This is another situation where chaos bred opportunity. And we’re taking full advantage.

Better still, when a major industry leader like Peabody provides such a bright outlook, you’re likely to see bottoming in that industry, which makes beaten stocks like National Coal even more attractive.

Bottom line… the markets may be volatile, but these are the times when fortunes are made.  Even the billionaires are well aware of that.

How to Maximize Coal Gains Further

This is a situation where long-dated calls options or LEAPS can also be used to profit from the bottoming of coal stocks.

LEAPS strategies, which we use in Options Trading Pit, have many advantages as compared to just buying or short selling a stock.

  • First, the option premium is typically less that the amount of cash needed to buy a stock.
  • Second, since the maximum risk on a LEAP play is equal to the premium paid, you know exactly how much you could use. There’s limited risk.
  • Third, there’s unlimited reward. Hit breakeven (strike price + premium = break-even), and your potential reward is unlimited.
  • LEAPS cost only a fraction of owning a stock. And they’ve been known to rocket higher as the underlying price moves. Say you own a $50 stock, and it goes up $5. Your gain is 10%. But say you own the January 50 calls, for example, at $1 and the stock went up $5. You could now be sitting on a few hundred percent gains.

Plus, with long-dated options or LEAPS…

  • Your risk is known.
  • And you can play "big picture" trends, using commodities such as gold and coal.

That’s how you maximize your potential gains, and take advantage of longer-term trends.  

Good Investing,

Ian L. Cooper

P.S. My Options Trading Pit service recently closed Murphy Oil put options for a 62% gain in 4 days, and we’ve already realized 95%, 49%, 206% and 133% gains on Lehman Brothers put options in about 4 trading days.

If you’d like to get in on the big money-making plays we’re cranking out each week in the Options Trading Pit, click here to learn how.