Alpha Natural Resources Cools; Is It Time to Buy?

NEW YORK (TheStreet) -- If you're a current Alpha Natural Resources (ANR) investor Wednesday's guidance update must have felt like having the power company cut off your service by mistake as guests arrive to your home.ANR ChartANR data by YCharts

TheStreet's Timothy Collins suggests ways to examine the energy space (You need a Real Money Pro account to read, but Collins' analysis alone makes it worthwhile.)

Alpha Natural Resources is a leading Central Appalachian coal producer that also has significant operations in Northern Appalachia. Alpha Natural Resources trades an average of 14.4 million shares per day with a marketcap of $1.7 billion.

Alpha Natural Resources has lost about 14% of its marketcap from Friday's close. The loss in market cap is a result in part from analyst Meredith Bandy at BMO Capital Markets in Denver lowering its rating on Alpha Natural Resources from a buy to a sell. Of the 19 analysts covering this company, most still rate it a buy. The average analyst target price for ANR is $20.72.

Monday's move lower follows the bearish trend in the 60-, 90-, and 200-day moving averages. Usually, the first break of the widely watched 200-day moving average fails and investors can expect a retest. (Read why I believe Amazon Isn't Worth Half its Current Price.)

Alpha Natural Resources's CEO Kevin S. Crutchfield blames the weather and natural gas.

Crutchfield stated during the Q1 conference call:
The demand for thermal coal has been diminished by the relative absence of winter weather in much of the United States and the related phenomenon of near-record-low gas prices, which has spurred coal-to-gas switching among utilities, including, for the first time in a significant way, utilities that burn Powder River Basin coal.

We could devote a lot of time to talking about issues in the domestic steam market, but the long and short of it is this: utility inventories have risen rapidly and now exceed 200 million tons, near record high levels, and coal-fired generation has recently fallen below 40% of U.S. electricity generation.

Institutional holders have aggressively walked away from Alpha Natural Resources. Over 32 million shares sold in the last six months resulting in a reduction of 22.5%. It's no surprise Alpha Natural Resources is trading at multiyear lows when the big money has transitioned out to the degree they have.

Other companies in the space are gapping down in price in sympathy Arch Coal ( ACI) down over 4%, Consol Energy ( CNX) down over 2%, and Peabody Energy ( BTU) was lower in the morning session, but pushed higher as the day moved along.

Peabody Energy reached oversold status on my chart in June and now Alpha Natural Resources is oversold. I like Peabody Energy as well for a stock that is unloved by the market. ANR Chart ANR data by YCharts

I don't believe natural gas has to move higher, but I do believe natural gas is oversold as well. As natural gas rises, so can coal move higher. Peabody Energy and Alpha Natural Resources are positioned to capture an increase in coal use. ANR Operating Earnings Yield Chart ANR Operating Earnings Yield data by YCharts

Based on my experience with gap downs following reductions in guidance similar to Alpha Natural Resources, investors are likely witnessing the lows or near lows for the summer. The entire space looks and feels "ugly" which is typical for a stock that has bottomed.

Shares have a long way to appreciate before running into overhead resistance near $8 a share. I expect sellers are nearing exhaustion and Alpha Natural Resources will bottom at least temporarily.

Bargain hunters and short sellers covering positions could push the price up about 30% to 50% in relation to the gap down price this week. Round numbers often attract like a price magnet and repel, causing a bounce. Expect a lot of volume to trade near $7 a share, but also be prepared for bargain hunters to start positions under $6.50 as an entry. Alpha Natural Resources price-to-earnings multiple is a negative. What you're buying is more or less an option without an expiration date.

If you are looking for Monday's drop to signal a buying opportunity, you are likely going to find intraday dips as the best opportunity. There is no hurry jumping on board and don't chase it up unless you're covering a short position.

Stocks dumping as a result of extreme negative sentiment normally take at least one good earnings release plus strong guidance to recover. Take your time and do your homework before allocating capital here. Look for the second break above $8 as the one that "sticks."

What's the best play with Alpha Natural Resources? I shorted the July $7 puts Monday for a "one night stand," but will look to position long as the week progresses.

There should be a very attractive entry coming up Tuesday and or Wednesday for a longer term hold. Otherwise if still trading lower, sell out of the money puts for August. Fear of continued losses tends to push portfolio insurance prices up dramatically, while at the same time the stock should bottom.

It's not one to get greedy with; hold on for a few days and, as the implied volatility falls (hopefully with a nice dead cat bounce), exit out with a quick hit and run for profits. Otherwise for longer term investors, the best play is to wait until Alpha Natural Resources demonstrates a support level.

At the time of publication, the author was short ANR put options.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

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