Coal on a Roll … Get it While it’s Hot

Hey There Income Hunters, 

I told you to enjoy the coal train back in May and recommended two quality coal producers:

      • Peabody Energy Company (Ticker: BTU): Up more than 100% since that publication and I called for a 300% rise in the next few years.
      • ARCH Resources Inc. (Ticker: ARCH): Up 25% and ARCH has fired up another mine just in time to boost momentum AND earnings. They are the coal leader and could easily double by the end of next year.

Asian Demand for Coal Soaring

China, India, Indonesia, and Vietnam produce 80% of all Asian coal, with plans in place to develop an additional 600 coal-power units …

With global infrastructure building plans in place, tons of steel (literally) will be needed and coal is used to produce 68% of the world’s steel.

Prepare for coal to soar in the next few years. To start, I’ll update data on BTU and ARCH to show you low risk high/reward trades.

Heating Up

Obviously, the price of coal is an important input into the potential revenue growth for these two companies. Well, take a look at this chart …

Peabody Energy Company (Ticker: BTU)

BTU’s thermal coal business should continue to benefit from higher liquid natural gas prices, new Chinese coal plant builds and increased domestic coal use for power generation.

BTU is purely a growth story, since 2020 was a down year for coal producers. Here is the technical chart setup …

With any trade idea, we have to have a good low risk/high reward setup to manage. BTU made a new all-time high on it’s Q2 earnings surprise, which was 58% higher than estimates …

It occurred however, on a lower RSI, high which triggered a negative RSI/Price divergence …

This is timely since it may allow us to get in close to $9.50, a price target that would give us a chance to potentially execute a Jan. 2022 10/14 call spread for about $1.40.

This would give us a 2.85:1 gross risk/reward ratio, and I think the probabilities favor us getting this opportunity…

ARCH Resources Inc. (Ticker: ARCH)

Arch just reported its latest quarterly result. It was highlighted by a strong outlook as its new Lear South mine is set to begin production later this year, adding to its growth momentum.

The stock is currently trading at a 12% discount, per the Power Income Fair Value Indicator:

Let’s take a look at the technical setup for ARCH …

It’s a similar setup to BTU, with ARCH beating earnings estimates by 48% and now correcting. I think the stock  could fall back to the $63.50 level, which provides an excellent entry point.

The trade with ARCH would be to buy the Feb. 18 $65/$70 call spread for around $150.

The gross risk/reward is a bit better for ARCH at 3.33:1, and since the company is already profitable (and is opening a new mine) ARCH may present a higher probability of success …

Bring It Home

Environment, social and corporate governance (ESG) and the pressure for renewable energy has presented a unique opportunity for investors. We are heading into an extended high inflationary environment that is not fully priced into the markets yet …

While production for some of the immediately demanded commodities has declined significantly — this includes coal and crude. Next time we will take a closer look at crude and view opportunities as it heads back to the bottom of the trading range.

Until the …

Live and Trade With Passion My Friends,

Griff

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