Peabody Energy (NYSE: BTU) is one of the largest coal mining companies in the world and it just so happens that the stock appeared on my bearish scan last night. After reviewing the daily chart, the bearish outlook stands a strong chance of being accurate. The stock has been in a downtrend for the past five months and there is a well defined trend channel that has dictated the boundaries of the downtrend.
The slow stochastic readings just made a bearish crossover and it comes at a time when the stock is the most overbought it has been in over a year. I have marked the last three times the stock reached overbought status based on the stochastic readings. Each of these three times marked on the chart represented a peak before the stock fell 14% or more.
Peabody is expected to announce earnings in the next few weeks, but it is unclear what the exact date will be. The reason I say this is that I checked four different sources and two have the earnings date as April 17 and the other two have the date as April 21. Regardless of the date of the earnings report, the consensus estimate is that the company will break even this quarter. The odd thing about Peabody Energy is that they have beaten their estimated earnings in each of the last four quarters, but the stock hasn’t been able to get out of the downswing.
From a fundamental perspective, there is a good reason that Peabody’s stock has continued to slide. The average EPS growth over the last three quarters has been -15% and the growth rate for the last three years has been -40%. Sales were down 14% in the last reported quarter and the sales growth for the last three years is a meager 2%.
Contributing to BTU’s underperformance is the push for renewable and clean energy production. The current administration is pushing for advances in alternative energy and the coal companies seem to be in the crosshairs of the energy policy.
Despite the poor fundamentals and the weak technical picture, the sentiment toward Peabody Energy is still skewed to the bullish side. The short interest ratio is only 3.4, the current put/call ratio is lower than 99% of the readings for the past year and of the 25 analyst with a rating on the stock, only one has a “sell” rating on it.
I look for BTU to fall at least 15% from here and I wouldn’t be all that worried about the earnings report. The earnings announcements have had very little impact on the stock over the past year. I would short the stock with a target under $15 and a stop-loss at $18.
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