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Trade-Ideas: Arch Coal (ACI) Is Today's "Dead Cat Bounce" Stock

Editor's Note: Any reference to TheStreet Ratings and its underlying recommendation does not reflect the opinion of TheStreet, Inc. or any of its contributors including Jim Cramer or Stephanie Link.

Trade-Ideas LLC identified Arch Coal ( ACI) as a "dead cat bounce" (down big yesterday but up big today) candidate. In addition to specific proprietary factors, Trade-Ideas identified Arch Coal as such a stock due to the following factors:

  • ACI has an average dollar-volume (as measured by average daily share volume multiplied by share price) of $34.9 million.
  • ACI has traded 5.0 million shares today.
  • ACI is up 3.6% today.
  • ACI was down 5.1% yesterday.

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More details on ACI:

Arch Coal, Inc. engages in the production and sale of steam and metallurgical coal from surface and underground mines located in the United States. The stock currently has a dividend yield of 2.6%. Currently there are 6 analysts that rate Arch Coal a buy, 3 analysts rate it a sell, and 10 rate it a hold.

The average volume for Arch Coal has been 8.8 million shares per day over the past 30 days. Arch Coal has a market cap of $982.7 million and is part of the basic materials sector and metals & mining industry. The stock has a beta of 2.01 and a short float of 15.9% with 3.86 days to cover. Shares are down 36.7% year to date as of the close of trading on Friday.

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TheStreetRatings.com Analysis:

TheStreet Quant Ratings rates Arch Coal as a sell. The company's weaknesses can be seen in multiple areas, such as its disappointing return on equity, poor profit margins, weak operating cash flow, generally disappointing historical performance in the stock itself and generally high debt management risk.

Highlights from the ratings report include:

  • The company's current return on equity has slightly decreased from the same quarter one year prior. This implies a minor weakness in the organization. Compared to other companies in the Oil, Gas & Consumable Fuels industry and the overall market, ARCH COAL INC's return on equity significantly trails that of both the industry average and the S&P 500.
  • The gross profit margin for ARCH COAL INC is currently extremely low, coming in at 14.37%. It has decreased from the same quarter the previous year. Along with this, the net profit margin of -9.42% is significantly below that of the industry average.
  • Net operating cash flow has significantly decreased to $8.75 million or 78.28% when compared to the same quarter last year. In addition, when comparing to the industry average, the firm's growth rate is much lower.
  • ACI's stock share price has done very poorly compared to where it was a year ago: Despite any rallies, the net result is that it is down by 43.74%, which is also worse that the performance of the S&P 500 Index. Investors have so far failed to pay much attention to the earnings improvements the company has managed to achieve over the last quarter. Naturally, the overall market trend is bound to be a significant factor. However, in one sense, the stock's sharp decline last year is a positive for future investors, making it cheaper (in proportion to its earnings over the past year) than most other stocks in its industry. But due to other concerns, we feel the stock is still not a good buy right now.
  • Currently the debt-to-equity ratio of 1.88 is quite high overall and when compared to the industry average, suggesting that the current management of debt levels should be re-evaluated. Regardless of the company's weak debt-to-equity ratio, ACI has managed to keep a strong quick ratio of 2.18, which demonstrates the ability to cover short-term cash needs.

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