4 Coal and Biofuel Stocks Investors Should Sell Right Now

NEW YORK (TheStreet) -- The coal and biofuel industries are moving in opposite directions. Coal is the largest source of energy in the U.S., but facing major headwinds from environmental groups and new legislation. Biofuels, or consumable fuels, is a small yet growing area, but lower oil prices are likely to throw a wrench in the industry's growth trajectory.

As the hot-button issue of climate change intensifies, President Barack Obama has pledged to cut carbon emissions from U.S. power plants by 30% from 2005 levels by 2030. The coal industry will be hardest hit.

Here are four stocks in the coal and biofuel industries to stay away from.

TheStreet Ratings projects a stock's total return potential over a 12-month period including both price appreciation and dividends. Based on 32 major data points, TheStreet Ratings uses a quantitative approach to rate over 4,300 stocks to predict return potential for the next year. The model is both objective -- using elements such as volatility of past operating revenues, financial strength and company cash flows -- and subjective, including expected equities market returns, future interest rates, implied industry outlook and forecasted company earnings.

Buying an S&P 500 stock that TheStreet Ratings rated a "buy" yielded a 16.56% return in 2014 beating the S&P 500 Total Return Index (SPXTR) by 304 basis points. Buying a Russell 2000 stock that TheStreet Ratings rated a "buy" yielded a 9.5% return in 2014, beating the Russell 2000 index, including dividends reinvested, by 460 basis points last year.

Click through to see these sell-rated coal and consumable fuel stocks.

Note: Year-to-date return percentages are based on Feb. 19, 2015, closing prices.

WLB Chart

WLB data by YCharts

4. Westmoreland Coal (WLB)
Rating: Sell, D+

YTD Return: -10.2%


Westmoreland Coal Company operates as an energy company in the United States. The company is engaged in the production and sale of sub-bituminous coal and lignite to plants that generate electricity. It owns six surface coal mines in Montana, Wyoming, North Dakota, and Texas.

"We rate WESTMORELAND COAL CO (WLB) a SELL. This is driven by a few notable weaknesses, which we believe should have a greater impact than any strengths, and could make it more difficult for investors to achieve positive results compared to most of the stocks we cover. The company's weaknesses can be seen in multiple areas, such as its deteriorating net income, poor profit margins and feeble growth in its earnings per share."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • The company, on the basis of change in net income from the same quarter one year ago, has significantly underperformed when compared to that of the S&P 500 and the Oil, Gas & Consumable Fuels industry. The net income has significantly decreased by 1880.8% when compared to the same quarter one year ago, falling from $2.76 million to -$49.13 million.
  • The gross profit margin for WESTMORELAND COAL CO is rather low; currently it is at 17.26%. It has decreased from the same quarter the previous year. Along with this, the net profit margin of -14.54% is significantly below that of the industry average.
  • WESTMORELAND COAL CO has experienced a steep decline in earnings per share in the most recent quarter in comparison to its performance from the same quarter a year ago. This company has reported somewhat volatile earnings recently. We feel it is likely to report a decline in earnings in the coming year. During the past fiscal year, WESTMORELAND COAL CO continued to lose money by earning -$0.42 versus -$0.63 in the prior year. For the next year, the market is expecting a contraction of 1881.0% in earnings (-$8.32 versus -$0.42).
  • Compared to its closing price of one year ago, WLB's share price has jumped by 32.19%, exceeding the performance of the broader market during that same time frame. Regarding the future course of this stock, we feel that the risks involved in investing in WLB do not compensate for any future upside potential, despite the fact that it has seen nice gains over the past 12 months.
  • Net operating cash flow has increased to $27.64 million or 17.38% when compared to the same quarter last year. The firm also exceeded the industry average cash flow growth rate of -16.12%.

SZYM Chart

SZYM data by YCharts

3. Solazyme (SZYM)
Rating: Sell, D

YTD Return: flat

Solazyme, Inc. manufactures and sells renewable oils and other bioproducts. Its proprietary technology transforms a range of plant-based sugars into triglyceride oils and other bioproducts.

"We rate SOLAZYME INC (SZYM) a SELL. This is driven by a few notable weaknesses, which we believe should have a greater impact than any strengths, and could make it more difficult for investors to achieve positive results compared to most of the stocks we cover. The company's weaknesses can be seen in multiple areas, such as its disappointing return on equity, weak operating cash flow, generally disappointing historical performance in the stock itself, deteriorating net income and generally high debt management risk."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • Return on equity has greatly decreased when compared to its ROE from the same quarter one year prior. This is a signal of major weakness within the corporation. Compared to other companies in the Oil, Gas & Consumable Fuels industry and the overall market, SOLAZYME INC's return on equity significantly trails that of both the industry average and the S&P 500.
  • Net operating cash flow has decreased to -$28.91 million or 47.10% when compared to the same quarter last year. In addition, when comparing the cash generation rate to the industry average, the firm's growth is significantly lower.
  • Currently the debt-to-equity ratio of 1.56 is quite high overall and when compared to the industry average, suggesting that the current management of debt levels should be re-evaluated. Despite the company's weak debt-to-equity ratio, the company has managed to keep a very strong quick ratio of 7.93, which shows the ability to cover short-term cash needs.
  • Looking at the price performance of SZYM's shares over the past 12 months, there is not much good news to report: the stock is down 76.42%, and it has underformed the S&P 500 Index. In addition, the company's earnings per share are lower today than the year-earlier 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.
  • The change in net income from the same quarter one year ago has exceeded that of the Oil, Gas & Consumable Fuels industry average, but is less than that of the S&P 500. The net income has significantly decreased by 29.2% when compared to the same quarter one year ago, falling from -$30.70 million to -$39.68 million.

 

ACI Chart

ACI data by YCharts

2. Arch Coal  (ACI)
Rating: Sell, D

YTD Return: -24.7%

Arch Coal, Inc. produces and sells thermal and metallurgical coal from surface and underground mines located in the United States.

"We rate ARCH COAL INC (ACI) a SELL. This is driven by a number of negative factors, which we believe should have a greater impact than any strengths, and could make it more difficult for investors to achieve positive results compared to most of the stocks we cover. The company's weaknesses can be seen in multiple areas, such as its disappointing return on equity, poor profit margins, generally disappointing historical performance in the stock itself and generally high debt management risk."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • 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 rather low; currently it is at 18.06%. Despite the low profit margin, it has increased significantly from the same period last year. Despite the mixed results of the gross profit margin, ACI's net profit margin of -32.22% significantly underperformed when compared to the industry average.
  • The debt-to-equity ratio is very high at 3.09 and currently higher than the industry average, implying increased risk associated with the management of debt levels within the company. Regardless of the company's weak debt-to-equity ratio, ACI has managed to keep a strong quick ratio of 2.34, which demonstrates the ability to cover short-term cash needs.
  • 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 70.00%, 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.
  • ARCH COAL INC has improved earnings per share by 35.8% in the most recent quarter compared to the same quarter a year ago. The company has demonstrated a pattern of positive earnings per share growth over the past two years. We feel that this trend should continue. This trend suggests that the performance of the business is improving. During the past fiscal year, ARCH COAL INC continued to lose money by earning -$2.64 versus -$3.52 in the prior year. This year, the market expects an improvement in earnings (-$1.65 versus -$2.64).

 

CERE Chart

CERE data by YCharts

1. Ceres  (CERE)
Rating: Sell, D-

YTD Return: 29%

Ceres, Inc., an agricultural biotechnology company, develops and sells energy crops to produce renewable bioenergy feedstocks in North America.

"We rate CERES INC (CERE) a SELL. This is driven by some concerns, which we believe should have a greater impact than any strengths, and could make it more difficult for investors to achieve positive results compared to most of the stocks we cover. The company's weaknesses can be seen in multiple areas, such as its generally disappointing historical performance in the stock itself and weak operating cash flow."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • CERE'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 82.86%, 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.
  • Net operating cash flow has decreased to -$6.29 million or 10.87% when compared to the same quarter last year. Despite a decrease in cash flow of 10.87%, CERES INC is in line with the industry average cash flow growth rate of -16.12%.
  • Current return on equity exceeded its ROE from the same quarter one year prior. This is a clear sign of strength within the company. Compared to other companies in the Oil, Gas & Consumable Fuels industry and the overall market, CERES INC's return on equity significantly trails that of both the industry average and the S&P 500.
  • CERE, with its decline in revenue, underperformed when compared the industry average of 20.6%. Since the same quarter one year prior, revenues fell by 47.6%. The declining revenue has not hurt the company's bottom line, with increasing earnings per share.
  • CERE's debt-to-equity ratio is very low at 0.00 and is currently below that of the industry average, implying that there has been very successful management of debt levels. Along with this, the company maintains a quick ratio of 5.14, which clearly demonstrates the ability to cover short-term cash needs.

 

 

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