Coal-related stocks remain one of my favorite groups for 2011. Not only do I like the industry’s fundamentals, but mergers and acquisitions activity also picked up in 2010 and should remain robust in 2011.
Every time a merger or acquisition (M&A) is announced in the stock market and the acquired company shoots up in price by a double-digit percentage, I kick myself for not having owned the stock beforehand. I’d be rich if only . . .! Hindsight is 20-20, of course. But sometimes, an observant investor can pick up on both big and little hints that suggest an M&A deal is right around the corner.
Take, for example, the announcement over the weekend (Jan. 29th) that Alpha Natural Resources (NYSE: ANR) will acquire
Metallurgical Coal is Very Profitable
The combination would create the largest
There are two major coal markets: thermal coal and metallurgical (coking) coal. Thermal coal is burned in power plants to produce electricity. This variety tends to have less energy content per ton and typically trades at a lower price. Metallurgical coal contains more energy and is used in blast furnaces to produce steel.
I’m no fan of Massey Energy because of it horrendous environmental and safety record, but former CEO Don Blankenship was to blame for most of these problems and he has thankfully left the company. The fact remains that Massey has the largest reserves of metallurgical coal in the entire country (1.3 billion tons), making it a very attractive target to the nation’s largest producer of metallurgical coal (Alpha). According to Stocks on the Run co-editor Yiannis Mostrous, “Chinese demand for met coal has soared, boosting the prices that producers earn.” In other words, the more met coal a company has to sell, the more profit it will make.
Such a combination makes so much sense from Alpha’s standpoint that it may come under investigation by antitrust regulators at the Federal Trade Commission. A concentration of so much metallurgical coal in the hands of a single company could reduce competition and cause higher coal prices.
Top Five Chances to Buy Massey Energy for Big Profits
Rumors that Massey may be in play started on October 18th when news outlets reported that the company had hired investment banking firm UBS to advise it on “strategic options,” including the sale of the company. Anyone could have bought Massey stock at the stock market open the next trading day for $38.09. Based on the takeout price of $69.33, this trade would now be an 82% winner. Let’s say that despite the October 18th news report you weren’t convinced that “strategic options” meant an acquisition, so you didn’t buy the stock.
Your next big chance occurred on November 5th when news broke that Alpha had approached Massey about a friendly takeover. The opening price of Massey the next day was $46.65 and this trade would now be a 49% winner. It’s possible that despite this news, you knew that CEO Blankenship was dead-set against a takeover so you thought the offer would be rejected and you didn’t buy the stock yet again.
Next up, news on November 22nd that Massey had retained investment bank Perella Weinberg Partners to coordinate a “formal review of strategic alternatives to enhance shareholder value.” The opening price of Massey the next day was $50 and this trade would now be a 39% winner. But you convince yourself that the lawyers required the review of Alpha’s offer so that Massey management couldn’t be accused of ignoring its fiduciary duties. Blankenship still has veto power so you once again don’t buy.
On December 3rd, the company forces Blankenship to retire. The opening price of Massey the next trading day was $51.41 and this trade would now be a 35% winner. With the main obstacle to a takeover now gone, virtually nobody could think the company wouldn’t be acquired, right? But then you think that the new CEO Baxter Phillips is a Blankenship protégé who probably also is against a takeover. No buy!
On December 7th, the Wall Street Journal reports that Massey has amended CEO Phillips employment agreement by doubling the golden parachute he will receive if the company is acquired. All doubt is now gone. Massey will be acquired. The opening price of Massey the next trading day was $50.68 and this trade would now be a 37% winner.
Pay Attention to Merger Rumors
The lesson to be learned: You don’t need insider information to score big winners in the stock market. Rather, you just need to pay attention to publicly-available information. Often you get several hints of what will happen. If you act right away on the hints, you can score a huge gain (e.g., 82%), but even if you hesitate and wait almost two months before acting, you can still make a big gain (e.g., 37%). All you need to do is pay attention and appreciate the value of news when it comes out.
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