Tuesday, July 15, 2008

Q: Where does logic run insane?

A: On Wall St.

This is a story about a stock, James River Coal Company.

James River Coal Company mines coal. It is a pretty big, not the biggest, but big enough. (It takes a lot of bulldozers to mine coal.)

The company employs about 1600 people and at the end of 2007 had a negative net income of $63 million dollars. JRCC lost money. Its nearest competitors made money.

There’s nothing too dramatic about this story: small size mining company loses money. Happens every day.

But, let’s pause for a moment and look at its stock price.
  • On March 24th, 2008 JRCC stock sold for $14.60 a share.
  • On April 24th, 2008 JRCC stock sold for $24.00 a share.
  • On May 23rd, 2008 JRCC stock sold for $35.87 a share.
  • On June 24th, 2008 JRCC stock sold for $62.48 a share.
That’s a 427% increase in the price of the stock in 90 days.

You’d think that the company was pumping out 4 times as much coal, or had done some reorganization magic and increased its profit margin from the 7.76% to the industry average of 27.92%.

Nope, not at all.

Why has the stock price of JRCC increased fourfold?

Well, let’s look at the price of oil during the same period or thereabouts.
  • Mar-2008: $96.87 a barrel
  • Apr-2008: $104.31 a barrel
  • May-2008: $117.40 a barrel
  • June 2008: $122 a barrel
  • July 3 2008: $145 a barrel
OK, oil is going up in price, about 66%.

So let’s see, the price of oil goes up 66% and the stock price of a mediocre mining company goes up 427%. Sounds sort of whacky doesn’t it? We’ll it is whacky.

So what happened? Here is what I think happened. Some whacky analysts somewhere said something like, "Oh shit, the price of oil is going up. In no time at all the \whole world is going to favor coal. There will be a huge demand for coal. The price of coal will go up. All the coal companies will make a fortune. Let’s buy all the in coal company stock that we can, balance sheets be damned."

Never mind that the sun has not yet come up on a day in the last fifty years that anybody has favored coal over oil. Jeepers, even nuclear's gotten a better rap.

And Wall Street does what it always has: take a morsel of logic and go insane.

Sort of makes the current banking situation looks well thought out doesn’t it?

Oh yeah, Apple sold a million iPhones over the weekend. The price of its stock dropped 2.44% today.

If this is not insanity, then tell me what is?

1 Comments:

Blogger Philip said...

check out djuscl over same period... http://finance.google.com/finance?client=ob&q=INDEXDJX:.DJUSCL

ppearlman

10:52 AM  

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