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Coal Stocks Rally on Romney Election Hopes


Arch Coal and Peabody Energy advance following the first presidential debate.

While this may not be great news, given Obama remains firmly in the lead in most reputable polls that currently exist, his odds of being elected have been slipping since the first debate. Below is a chart of Intrade's probability of Obama being re-elected for a second term. For those of you unaware of Intrade, it is a site where people can speculate on political outcomes, current events, etc. Surprisingly, the website has an uncanny track record at actually predicting what will transpire. Since peaking near an 80% probability immediately before the first debate, Obama's odds have slipped dramatically to a current reading of about 60%. This can be largely attributed to his lackluster performance in the first debate. There are still two more debates before the election, though, so anything can happen. However, if Romney continues to outshine President Obama, it can reasonably be inferred that this graph below will continue to drop.

Should Romney's odds of being elected continue to improve, you can't help but think coal names will rally sharply into November. This week alone, Arch Coal has jumped about 5%, and Peabody is up about 3% from Friday's close. While this may seem trivial, the rally has come amid a broad market that is down about 1% over the past two days.

In addition to this, the International Monetary Fund ("IMF") and the World Bank both lowered their gross domestic product ("GDP") estimates for the entire world, namely China and the rest of Asia. China is a major consumer of coal products, so one would tend to think that this news would be very bearish for coal names. However, this hasn't come to fruition. A major reason for this could be that sentiment has become over-the-top bearish on the industry as a whole. The chart below shows the skyrocketing short interest on Arch Coal. In fact, the current 52 million shares that are sold short is an all-time high for the company.

As with Arch Coal, short interest on Peabody looks very similar…

While I'm not saying go out and buy coal stocks right here and now, the present environment in these names, as well as the political backdrop create massive upside potential. Keep a close eye on Romney's odds to win the election in November, and should they continue to rise, one can't help but think that these beaten-down names could rally dramatically into the end of the year.

This article by Bryan Sapp was originally published on Schaeffer's Investment Research.

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Twitter: @schaeffers
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