BTU: More Upside Than Down

Chasing momentum on an intraday or multi-day basis is a lot of fun and why I run a live trading room.

Anticipating volatility and rotation into a stock, sector or index that lasts multiple weeks is my bread-and-butter swing trading.

But there is something to be said about ‘set it and forget it’ trend investing.

Peabody Energy (BTU) falls into this category.

And because I follow it closely, it can be a chase and even a swing trade, all the while it is in my TREND LONG-ONLY portfolio for clients from May 2021 at $5.31. (That’s 376% on a cumulative gain basis.)

Case in point, about a month ago, BTU finally formed a very bullish engulfing bar on its weekly chart, and started to break up higher out of its long-held consolidation pattern.

Then on January 18th, I caught the news live in my trading room that Peabody Energy will be included in the S&P SmallCap 600 index.

PEABODY WILL REPLACE E.L.F. BEAUTY IN S&P SMALLCAP 600

This is a a LRE (low risk entry) CHASE above $24.62.
It can also be a Swing for those who want to play the breakout once it can/get stay above $26.30.

The idea to add as SWING long was that this could be the potential for energy (forgive the pun) to push it up and out of weekly resistance at $27.28.

Nope. That’s exactly where it got repelled just before earnings last week.

Do Fundamentals Matter?

As I’ve often discussed with clients, BTU has worked off its very large debt stack the last 2+ years and is quite profitable; but for some reason, it just couldn’t rise up with its peers - a core thesis of mine last year when I added CEIX in May because the sector looked ripe for a run into end of 2023.

BTU clearly underperformed its peers last year: HCC, ARCH, AMR, NRP, METC.
Even CEIX (position in our Trend Long portfolio added May 2023 at $59.38) doubled off the June 2023 bottom.

So what is wrong with Peabody, besides the fact it is not an AI=beneficiary?

From a fundamental take, one key factor behind BTUs underperformance is its exposure to thermal coal rather than metallurgical coal, which has been less favorable in recent years - that and issues around corporate governance which may have prompted a big investor to exit... Elliott Management had a 10% stake in the company, but is down to 11.1M shares.

But otherwise, the financial picture and future guidance for BTU look good.

As “The Coal Trader” (@dyer440) supposes:

“the price spreads between high-quality coking coal relative to lower-quality coking coals are here to stay. In the years to come, producers with higher-quality coking coal production will enjoy superior profit margins compared to lower-quality portfolios. Centurion will help accomplish this for Peabody.”

Another coal bull sums up nicely:

BTU reported $724m of free cash flow on an Enterprise Value of $2.8bn. That’s a 26% return on its Enterprise Value. Not bad for a company sitting on a massive net cash position equivalent to 20% of its market cap!

Le Shrub @agnostoxx continues:

Peabody boasts a $3 billion market capitalization with $1 billion in net cash and generates an impressive $1 billion in EBITDA, making it a cash-generating machine.

And then there is Peabody's new $325 million revolver that could provide additional capital for potential buybacks, which could be a positive catalyst for the stock.

So the above reasons are why BTU doesn’t fall in price, but also potentially why BTU likely hasn’t risen: That index inclusion acted as a liquidity event, allowing Elliott to sell into.

What’s The Trade?

For now, I’m not buying this potentially false narrative that BTU is done going up on China slow-down risks but see this pullback as further support it’s digesting Elliott, as commodities in general get ignored on falling inflation expectations while big money and small chase the FOMO of AI-focused tech.

Since it was already recommended in May 2021 at $5.31, I see no reason to unload it. Actually, it is doing exactly what I want in a set-it-and-forget-it holding that represents present and future value. It continues to be a strong hold. I will recommend adding once it gets and stays above $27.28 on a weekly close ;-)