TAKING STOCK: Coal stocks

Dear Mr. Berko: In January 2012, on your recommendation, I bought 2,000 shares of Synovus Financial at $1.97 a share and made a $2,800 profit, selling them in the summer of the following year at $3.38. I should have held those shares because they now trade at $25. I would have made nearly $50,000. That was a brilliant, fantastic and impressive recommendation, and I'm still kicking myself. My broker thinks the same profits are possible in a coal stock called Walter Energy, which sells for 86 cents, and recommends that I buy 5,000 shares. Could you recommend any other cheap stocks for me to invest in? -BD, Port Charlotte, Fla. Dear BD: I'm reluctant to disabuse you of that Synovus conclusion. Don't get all ooey-gooey on me, because it seems that your cerebral cortex isn't functioning properly. About seven months after you sold Synovus Financial (SNV-$25.96), it had a 7-for-1 reverse split, which would have reduced the number of shares you owned to 258. And if you still owned those 258 shares today, they would be worth about $6,450, which, though still respectable, is not the gain you figured. But no, a thousand times no. Cheap stocks-or "nickel cigar stocks," as Bernie Madoff called them-are not "investments." Rather, they're rank speculations. Stop tilting at windmills. From 1920 until 1960, John L. Lewis was the tyrannical, brutal, spiteful and pro-Soviet president of the powerful United Mine Workers of America. For decades, "Mad John" and the coal industry ran this country like Caesar ran Rome. Today "Old King Coal" is a mere image of its past power and glory. It's an inutile industry, brought to its knees because of past profligacies, an inability to compete with cleaner and more efficient fuels, the oil price collapse, and a slowing world demand. Natural gas has become the fuel of choice today-representing more than 32 percent of the power generated domestically, versus 10 percent a dozen years ago. And the coal industry is also facing headwinds as China, the world's largest coal consumer, begins to grapple with a weakening economy, including a potentially looming recession. And lastly, environmental regulation has been challenging the industry for years. This sector was dealt a wounding blow in late 2013 with stringent legislation in the U.S. to curb carbon dioxide emissions from electricity generators, and China may be very close behind. So your adviser's recommendation that you purchase Walter Energy (WLT-$0.86) suggests that he may have yesterday's ice cream for brains. However, if oil returns to $100 a barrel late this year or early next year, as former Shell CEO John Hofmeister recently suggested, WLT may be a winner. Vulture funds-managed by evil speculators who were probably incubated in colostomy bags-are aggressively betting against the shares of WLT and other coal companies, purchasing their bonds as prices fall between 20 cents and 40 cents on the dollar. These vultures will do everything in their power to encourage and force struggling coal companies into bankruptcy. And when a coal company declares bankruptcy, the vultures will exchange the debt they bought (at 20 cents to 40 cents on the dollar) for controlling shares of the company. Then, when coal prices rebound (they were as high as $140 a ton in 2008 and have fallen to $12 a ton), the vultures will sell their mines and other assets at a profit. According to an excellent source at the Financial Industry Regulatory Authority, Walter Energy seems to be a favorite target at two big vulture funds. WLT owns several prolific low-cost mines that produce metallurgical coal (very low in carbon and high in calorific value), which is used in the production of coke, a critical component of the integrated steel-making process. The vultures have purchased hundreds of millions of dollars' worth of WLT bonds, with yields as high as 24 percent, while shorting WLT's unsecured bonds, which trade at 18 cents on the dollar or so. Those mines would be quickly and hugely profitable if WLT weren't obliged to recognize its debt. Cheap stocks are cheap because that's what they're worth, which may also be said of cheap stock advisers. -------- Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775, or email him at mjberko@yahoo.com. To find out more about Malcolm Berko and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate website at www.creators.com. ©Copyright 2015 Creators.com Published: Thu, Feb 05, 2015