Over the years, the United States has had a love/hate relationship with coal mining. While we have enjoyed the power and jobs the industry has supplied, the dangerous conditions for workers and the pollution created have kept mining companies from becoming corporate darlings. The current administration has made it a priority to reduce the country’s dependence on coal for cleaner alternative energy supplies. This mandate from the White House has taken its toll on a number of mining companies and Peabody Energy (NYSE: BTU) is no exception.
Looking at the weekly chart you can see how the energy stock has been in a downtrend for the last four years, but the fact is the downtrend goes all the way back to 2008. The all-time in June 2008 was $83.72, and now the price is under $20. The stock has just broken above the downward sloped trendline, but based on other factors, I think it is a false breakout. One of which is also visible on the weekly chart and that is the high from last November—right around the $21 level.
Turning our attention to the daily chart, we see that BTU has experienced back to back shooting star formations in the last two days. Just to review, a shooting star happens when the stock moves higher after the open and then the price falls throughout the trading day and closes back down near the opening price. It forms a long tail on the top side with a small body. Looking at significant tops from November and January, we see that both of those rallies ended with shooting star patterns being formed at the top. The stock also experienced a bearish crossover of the slow stochastic readings which is yet another bad sign for the stock.
The fundamentals show that the decline in price is warranted. The EPS rating in Investor’s Business Daily is eight. This means that from an earnings perspective Peabody Energy stock has performed worse than 92% of all publicly traded companies over the past few years. The three-year EPS growth rate is -40%.
Despite the terrible price action and poor fundamentals for Peabody Energy, the sentiment toward the stock is still relatively optimistic. The short-interest ratio is only at 3.4 and the put/call ratio is in the 56th percentile. Looking at the analyst ratings we see 17 “buy” ratings, six “holds” and one “sell”.
I look for Peabody Energy stock to drop at least 15% in the coming weeks. I would use a move above the $21 area as a stop. The risk/reward relationship isn’t as strong as I would like, but given the poor fundamentals, the optimism toward the stock and the patterns developing on the chart, I fell the probability of a decline is too great to pass up.
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