As a student of contrarian thinking, I am always on the lookout for the next great idea that defies herd mentality. I have found that the very best ideas come out of moving against the crowd when the trade becomes “over crowded”. This can work in two ways. Markets can pile into a stock or sector with rabid enthusiasm – the opportunity is to sell at this point. Or, they might vacate/avoid a stock or sector out of fear or overdone pessimism – the opportunity being to buy into that pessimism. In either case, you need to apply some critical thinking when searching for contrarian investment opportunities. Its tougher than it sounds. But it can be done.
Back in the summer of 2020, I was urging readers of this blog to move into value stocks, commodities, energy, and “re-opening” stocks. Those sectors were unpopular when I wrote about them. Go back to my blogs of mid-late 2020 and read my reasoning behind these calls at that time. In each case, the market was calling for a “new paradigm” – whether it was the stay-at-home trend to be the new reality, or the demonization of fossil fuels in the “enlightened” world of alternative energy sources.
In all of these cases, the market had gone too far. Stay-at-home technology names and clean-energy names soared to ridiculous valuations. Meanwhile, old economy names and fossil fuel producers were dumped. As with any crowded trade, the market had gone too far in one direction by overestimation or underestimating the reality behind the investment theme. So, things corrected themselves. Technology underperformed, clean energy topped. Meanwhile, go-outside and fossil fuel stocks turned around. Formerly under loved sectors are now in significant profit positions. So, what’s next?
I believe there are two sectors we should be considering as contrarian trades. One sector, which I covered in early February is the Consumer Staples sector. I’d encourage you to read that blog for my full argument as to why I like the sector. On a recent video conference for Investors Digest readers, I mentioned that this was a sector that we at ValueTrend are very slowly dipping into. We’ve just begun to initiate positions in our conservative and aggressive platforms. We anticipate legging in over the coming months. We feel that this sector will take a while to move, but its cheap, with some stocks exhibiting very nice breakout patterns.
The other sector that we just began dipping into is indeed a contrarian idea. Like the energy trade idea presented on this blog last October, it will rub some investors the wrong way. Like the energy trade seemed to be at the time – this idea will strike you as “radical” . I hope it does, because that will imply I’m on the right path.
Coal has been getting a bad rap over the past few years. Its considered “dirty” energy. And dirty energy isn’t in vogue. But, then again, neither were oil and gas. But market realities countered the clean-green trade, making for a significant investment opportunity. I think coal is in that same situation. To understand the trade, lets examine the two bigger markets for coal:
Electricity: While electricity production using coal is dissipating in North America, it continues to grow in India and China. As I hammered on this blog back in October: China and India are the fastest growing economies in the world. They are completely distancing themselves from the “clean energy” movement. To be perfectly clear – they don’t give a damn, and have illustrated complete disinterest in joining the clean-green party. Growth matters, and there’s no incentive for either nation to go thorough the expense and aggravations to change their power facilities to cleaner power. Period.
Industrial production: Coal (coke) is used in the production of steel. Economic resurgence means increased demand for commodities like steel. Coal can also be used in production of cement, paper, aluminum, ammonia, creosote, etc. That sounds like re-opening materials to me…and I am sure that our friends in the East will want in on this action too.
Keep in mind that coal will display differing volatility characteristics to that of oil, and gas. For that reason, we’ve only added a direct coal play to our ValueTrend Aggressive Strategy. We have no direct coal exposure in our ValueTrend Equity Platform. Having said that, there are many mining and metal producers with diversified portfolios, including coal exposure. We do have one conglomerate with coal exposure in our conservative Equity Platform. Below is a chart of one such broad-based producer with significant exposure to coal, BHP (we do not hold shares of BH Group). Note the nice breakout after a long sideways market from January 2019- mid 2020.
Now lets take a look at a couple of the pure coal plays. There are many more than I am posting here, so it would be prudent to do your own chart-gazing and fundamental analysis to determine if these, or other coal producers, are appropriate for your portfolio.
Arch Resources (formerly Arch Coal) is involved with metallurgical and thermal coal products. We do not own a position in ARCH, although we are watching it for a breakout. The stock is basing beautifully. If it breaks $53 with conviction (ie, for at least a week), the upside targets $65 to $90 from a technical perspective.
SunCoke Energy (SXC-US) was bought in our ValueTrend Aggressive Strategy in mid-February after it broke its $6 neckline. The stock targets anywhere from $9 to $12 on a technical basis. Lots of reward potential, commensurate with the risks.
Finally, an indirect play on coal is Westshore Terminals (WTE-T). This company doesn’t produce coal, but they ship it overseas to you-know-who. If overseas production increases, it stands to reason that WTE would benefit. The stock pays a dividend, too. You wont get the upside or the downside with this stock, but its kind of a back-door play on coal for those who haven’t the stomach for the higher levels of risk on a pure coal play. The chart broke through its $18 neckline, which suggests a $22 target. That might imply a maximum return of about 15% from current levels. We have it on our watch list and have not bought this stock.
ValueTrend Performance numbers are posted
As noted above, we’ve seen some nice returns as our formerly contrarian value and re-inflation trades outpaced the markets. We’re still shifting things around and looking for opportunities, just like today’s coal trade idea. There’s money to be made in this market. But you need to keep an eye open for the right opportunities. Click here to see our month-end numbers for February. Be sure to check out the Aggressive Strategy numbers while you are in there.
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We’ll be happy to set up a phone conference or Zoom meeting to explain how we can manage your money as prudently and conservatively as we all of our clients. There’s no obligation or pressure when you reach out to us. It’s a friendly conversation with Keith & Craig, where you’ll get straight answers without the sales-pitch! We look after family investments – including RRSP, TFSA, Corporate and Personal Investment Accounts. If you hold around $500k or higher and feel you need a second opinion on your portfolio, give us a call!