One of the most important bankruptcies of the decade should be announced over the next few days. And if you like taking a long-odds bet, there’s one clear winner.
Whether you want to believe it or not, coal powers the world.
As we write, leaders from all over the world are fighting about that fact right now. But no matter how you cut it, the dirty fuel isn’t going away.
On Monday, talks began in Paris to address the climate change issue. President Obama has already made the case that this is one of the most important — if not THE most important — issues in the world right now.
He has taken aggressive action, including going around Congress, to reduce the use of coal in power generation in the U.S.
However, this is a battle Obama will lose.
Secretary of State John Kerry has recently spoken out against India’s pro-coal position. But that doesn’t mean the country will change its stance. Both India and China — with populations totaling about one-third of the entire earth — have no choice but to use coal to fuel their growing electricity demand.
On top of that, states here in the U.S. are taking legal action against Obama’s policies. Twenty states so far have already brought cases to court to get around the recent EPA restrictions of coal-fired plants. And that plan has only been around since August. So, more are sure to join.
So for the foreseeable future, coal will remain an important source of power generation.
That doesn’t mean that the industry is doing well, however.
The number of coal producers filing for bankruptcy is shocking:
And you can soon add one more name to this list … and it’ll be a big one.
Arch Coal Inc. (NYSE:ACI) is the second-largest coal producer in the United States. But in the next few days, that should change.
The company has far too much debt and too little income to survive past the end of this year. It has $5.1 billion in debt coming due in the next few weeks. Yet the company itself is only worth $24 million by market cap.
So no matter what is decided in Paris, facts are facts. We expect Arch to go under.
But precisely because of these Paris talks, Obama’s eventual failure on this subject and Arch’s inevitable bankruptcy, there is one potential winner in this whole mess.
You see, even though the rest of the industry is experiencing severe pain right now, coal isn’t going away. Someone will have to continue producing it. And that someone is Peabody Energy Corp. (NYSE:BTU).
Peabody is the largest coal company — outside of state-run ones — in the world. It has huge operations around the globe — in 25 countries, to be exact.
More importantly, even with coal at bargain-basement prices and the headlines about the commodity about as negative as possible, Peabody remains — however slightly — a cash-flow-positive company.
It’s not making any records. And it has its own severe debt load to contend with.
But it is staying in business.
With the No. 2 company about to go under, Peabody stands to pick up enormous assets through Arch’s eventual court-ordered liquidation at just pennies on the dollar.
And because of the slew of bankruptcies, negative news articles, world climate talks and general hate for coal as a commodity, Peabody is also one of the largest "sell" targets in the market.
The company is down more than 90% year-to-date.
Please click the image for a larger view.
Everyone seems to hate it. And that’s exactly where any smart speculator needs to look for bounce-back opportunities.
As you can see from the above chart, shares of Peabody are extremely volatile. But even in face of the Obama/EPA regulation announcement back in August, they doubled in price in just one month.
Those little rallies should continue. If you get in prior to the Arch bankruptcy, during the Paris climate talks, you might be able to take advantage of the next one.
Now, we’d be foolish to say this was a sure thing. Peabody is by no means a safe investment.
But if you are looking for a contrarian small cap with homerun potential, consider picking up a few shares of Peabody. Only use money you can afford to write off completely.
If you do, look for an early 2016 rally … as the Arch properties go on sale.
The Uncommon Wisdom Daily Research Team