Wednesday, June 13, 2007

Another Update: Peabody Energy (BTU)

Another in follow ups this week. As I have said before, it is important to review your past decisions so that you may make better ones in the future. If your analysis and reasoning is proving to be correct, keep it up, if flawed, change it. Let's look under the hood again.

On April 12th, I posted about Peabody Energy (BTU). As usual, please read the complete first post first to better understand this one.

In April with shares trading at $45, I wrote:

"Just as investing in alternative fuels begins and end with Archer -Daniels Midland (ADM), commercial roofing and insulation with Owens Corning (OC) and paint and coatings with Sherwin Williams (SHW), investing in coal begins and ends with Peabody Energy (BTU) . Since their initial public offering on May 22, 2001, at $28 per share, or $7 per share on a split-adjusted basis following the March 2005 and February 2006 two-for-one stock split, shares hit a high of $75 in May of 2006. Since then, shares have fallen steadily (40%) to their current level of $45 despite growing earnings last year 60% . The world's largest public coal company, their products fuel approximately 10 percent of America's and 3 percent of the world's electricity."

I finished by saying:

"So, all this now has us considering buying shares of a company that is the world leader in its industry, with increasing demand and pricing power for its products selling at historically low levels....

ValuePlay anyone?"

So, I sold a few puts, hoping for the price to fall a bit so i would be able to pick up shares for less than the $45 they were trading at. What happened? They immediately began a March up to $55 for a 20% gain. Why? In the weeks after my post 7 analysts came out and either raised the rating or their price target for the stock and Peabody announced they were going to spin off their Appalachian assets that had been viewed as a drag on earnings. Oh well, at least we made good money on the puts we sold. The most important takeaway is that we are still picking winners and given the choice of making a pick and watching it drop vs watching it rise, I'll take this any day. It means we are picking stocks that when we do buy, based on our criteria, have a better chance of success.

What to do now? Shares have given up some of their gains recently and now sit at $50. With the money we made on the initial puts and what we can sell new ones for, we may actually be able to get into this thing at the original $45. Could happen....


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