Dead Cat Bounce or Genuine Value Opportunity?

Jacob is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Even though the US stock markets are creating new highs, some sectors are languishing the wider markets. Dow Jones Industrial Average has returned nearly 15% so far this year but coal remains one sector which has remained completely oblivious to this rally. 

It thus comes as a surprise that the stock of Cliffs Natural (NYSE: CLF) jumped 4 percent last week. The company is an iron ore producer and a producer of metallurgical coal. Both of these commodities are in abundant supply as factory output remains low and news on economic activity across the world continues to remain grim. In addition, low natural gas prices continue to play the bull in the China shop. In the middle of this, Cliffs Natural Resources seems to be attempting a breakout although it is still down 15 percent on a monthly basis. Trading close to its 52 week low, the stock is attractively priced from future earnings perspective which is also highlighted by a forward price earnings ratio of 8.1.

But there's more to this story....

However, there appears to be more to the story than just value buying. It has a high short ratio of 23 percent which indicates the market is betting that the company will not be able to control costs and will post disappointing results. Given its financial performance in recent quarters , it is not surprising. The company is expected to announce its quarterly earnings on April 22.

Alpha Natural (NYSE: ANR) is also a coal producer and by this definition, it is free of fancy valuations. The company supplies steam and metallurgical coal to large utilities and industrial customers as fuel for electricity generation. As natural gas is making unabated inroads in this market, coal companies have been at the receiving end and Alpha Resources is no exception.

The stock has lost 44 percent over the last year and is currently available at $7.9 compared to its 52 week range of $ 5.28 - $17.30. This is a loss making company so profitability valuation ratios are not applicable but a 65 percent discount to its book value per share screams undervalued. Despite the mounting losses and being US-focused, the stock is holding on to its levels rather well. Most brokerage houses predict higher valuations for the stock as almost everyone has a ‘Hold’ or ‘Market Perform’ rating on it. The company reports its first quarter earnings on April 29.

Poster boy turns villain

Finally, Molycorp (NYSE: MCP) happens to be a golden goose turned black swan. The stock is down 83 percent over the 12 months but has recovered nearly 5 percent last week. The jump in the stock appears to be on account of aluminum producer Alcoa’s bumper earnings rather than a positive development for the company or the sector. The company produces rare earth metals which are used in almost all products anything to do with electronics.

However, the big bet was that the company’s fortunes will go through the roof once electric vehicles are bought and sold as candies. Of course, this never happened and what we see as of now is another attempt by short sellers to make money off this beleaguered poster boy. However, this can be viewed differently as the company trades at nearly a 38 percent discount to its book value per share and a forward price earnings ratio of 22 offers some hope. Not to mention some more help coming in from national governments which is primed to help sales of electric cars.

Foolish bottom line

Overall, there appears to be nothing going in favor of these companies but it could just be the right time to start buying these businesses. This is especially true for Molycorp which still offers near future hopes of profitability. However, investors would do well to keep an eye on latest quarterly earnings for indications of a turnaround before taking a plunge.


Jacob Wolinsky has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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