Shares of coal miner Cloud Peak Energy Inc. (NYSE: CLD) jumped as much as 25% in trading today as energy prices surged higher. The stock held most of its gains late in trading and was up 19.8% as of 3:10 p.m. EDT.
There wasn’t any specific news from Cloud Peak Energy or the coal industry more broadly, so this looks like a move driven by energy enthusiasm from traders. The biggest jump of the day was oil, which is up 2.4% as I’m writing at $68.30 per barrel of WTI crude oil. That helped push oil stocks higher and Cloud Peak Energy went with it.
This is a case where traders are thinking a company like Cloud Peak Energy could benefit from rising energy prices more than other stocks because it’s highly leveraged. At the end of the first quarter of 2018, the company had $406.3 million of debt and lost $7.7 million last quarter. Any surge in prices would help turn the company toward profitability in the second quarter and debt should leverage its returns versus competitors. That’s the theory for traders today.
While it seems like a good idea to jump on leveraged energy stocks as energy prices rise, it’s a risky way to invest in energy. Oil, natural gas, or coal prices could just as easily turn south tomorrow, and remember that Cloud Peak Energy still isn’t profitable despite positive coal policies in the U.S. over the past year and a half. I’m skeptical of today’s bounce and think it’s more speculation than a fundamental reason for long-term investors to jump into the stock.
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