Is Peabody Energy Oversold?

With shares of Peabody Energy (NYSE:BTU) trading around $20, is BTU an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

T = Trends for a Stock’s Movement

Peabody Energy is a private-sector coal company that owns interests in 28 active coal mining operations located in the United States and Australia. In addition to the company’s mining operations, Peabody Energy markets and brokers coals from its operations and other coal producers, both as principal and agent, and trades coal and freight-related contracts through trading and business offices. It conducts business through four principal segments: Western United States. Mining, Midwestern U.S. Mining, Australian Mining and Trading and Brokerage. Coal prices have been on the decline over the last several years for several reason. Although cheap, consumers and businesses are opting for cleaner and more efficient sources of energy. At this point, the company may need to see a significant rise in coal as a source of energy in order to see gains into the future.

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T = Technicals on the Stock Chart are Weak

Peabody Energy stock has seen on the decline for the last couple of years and is now trading at prices not seen since the lows established during the 2008 Financial Crisis. Lower stock prices may be ahead if the stock makes a clear break below these key stock price levels. Analyzing the price trend and its strength can be done using key simple moving averages. What are the key moving averages? The 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages. As seen in the daily price chart below, Peabody Energy is trading below its declining key averages which signal neutral to bearish price action in the near-term.

BTU

(Source: Thinkorswim)

Taking a look at the implied volatility (red) and implied volatility skew levels of Peabody Energy options may help determine if investors are bullish, neutral, or bearish.

Implied Volatility (IV)

30-Day IV Percentile

90-Day IV Percentile

Peabody Energy Options

41.72%

0%

0%

What does this mean? This means that investors or traders are buying a very minimal amount of call and put options contracts, as compared to the last 30 and 90 trading days.

Put IV Skew

Call IV Skew

May Options

Flat

Average

June Options

Flat

Average

As of today, there is an average demand from call buyers or sellers and high demand by put buyers or low demand by put sellers, all neutral to bearish over the next two months. To summarize, investors are buying a very minimal amount of call and put option contracts and are leaning neutral to bearish over the next two months.

On the next page, let’s take a look at the earnings and revenue growth rates and the conclusion.

E = Earnings Are Decreasing Quarter-Over-Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. Also, the last four quarterly earnings announcement reactions help gauge investor sentiment on Peabody Energy’s stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for Peabody Energy look like and more importantly, how did the markets like these numbers?

2013 Q1

2012 Q4

2012 Q3

2012 Q2

Earnings Growth (Y-O-Y)

-114.29%

-558.02%

-84%

-28.57%

Revenue Growth (Y-O-Y)

-14.27%

-9.55%

3.94%

0.91%

Earnings Reaction

7.57%

5.56%

11.81%

-11.26%

Peabody Energy has seen increasing earnings and revenue figures over the last four quarters. From these figures, the markets have been pleased with Peabody Energy’s recent earnings announcements.

P = Poor Relative Performance Versus Peers and Sector

How has Peabody Energy stock done relative to its peers, Arch Coal (NYSE:ACI), BHP Billiton (NYSE:BHP), Consol Energy (NYSE:CNX), and sector?

Peabody Energy

Arch Coal

BHP Billiton

Consol Energy

Sector

Year-to-Date Return

-23.07%

-31.42%

-12.83%

8.57%

-14.14%

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Peabody Energy has been a relative underperformer, year-to-date.

Conclusion

Peabody Energy provides coal energy products and services to a wide range of companies in various industries worldwide. The stock has been in a steep decline for the last few years but may be stabilizing at these current prices. Earnings and revenue figures have been decreasing, over the last four quarters, but investors have been pleased with what they’ve heard during the earnings reports. Relative to its peers and sector, Peabody Energy has been one of the worst performers, year-to-date. STAY AWAY from Peabody Energy for now.

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